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Home Bancshares Inc. (NASDAQ:HOMB)

Q1 2013 Earnings Call

April 18, 2013 2:00 PM ET

Executives

John Allison – Chairman

Randy Mayor – Treasurer and CFO

Donna Townsell – VP, Corporate Efficiencies

Randy Sims – CEO

Brian Davis – Chief Accounting Officer and Investor Relations Officer

Kevin Hester – Chief Lending Officer

Analysts

Michael Rose – Raymond James

Jon Arfstrom – RBC Capital Markets

Joe Fenech – Sandler O’Neill

Matt Olney – Stephens

Brian Martin – FIG Partners

Kevin Reynolds – Wunderlich

Operator

Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Incorporated First Quarter 2013 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks then entertain questions.

(Operator Instructions)

The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in March 2013.

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.

John Allison

Thank you, Amy. Welcome to Home Bancshares’ first quarter earnings release and conference call. I’m here with the regular crew, Randy Sims, our Chief Executive Officer; Randy Mayor, Chief Financial Officer; Brian Davis, Chief Accounting Officer; Kevin Hester, Chief Lending Officer; and Donna Townsell, Vice President of Corporate Efficiencies. They are all be reporting to you today.

The numbers came out before the market opened this morning and I hope you are as pleased with them as I am. I kind of hit the hotspots today and let Randy be more specific, but we came out with a record ROI for the quarter on both a regular basis, GAAP basis as well as core basis. We came out with a 2.77% core, 46% efficiency ratio, 5.15% margin, improvement in asset quality, non-performers went down. Non-performing loans and non-performing assets both declined.

Reserve remained strong, and a good 1.83% reserve, I guess non-performing loans. In addition to 5.13% credit mark if you add in the additional mark. Income of $17.5 million or $0.62 per share. We – March 26, we paid off the $26 million in trust preferred that we told you we were going to do. We only have about $3 million of that left and it’s 2%, so we’re going to leave that a little bit. I think we have some federal home loan borrowings coming in June that make more sense at a higher rate. We converted Tampa in mid-March. We’ll convert Tallahassee this weekend. We had record interest income and net interest income.

On the loan side, loans were down by about $10 million, but we actually had a pretty good first quarter. We told you the fourth quarter that we were expecting some pretty good fast payoffs. Well, that happened in the first quarter. However, we booked $114 million in new loans but with normal amortization and the big pay downs, we fell a little short. Nice pipeline exist today and we are up from March 31. If things fall our way, it could really be a nice second quarter. We’re back into same position we were last year with more opportunities on acquisitions than we have time and money.

We will be prioritizing the deals this week and traveling to those selected banks this month – towards the end of the month. I’m confident that we’re bringing one or two deals this year, obviously, our company is on the way to our current goal of Home $2.50. I do not see $3 yet, but looking at some of the deals that we’re looking at, I see a way we may be able to get there. So stay tuned.

Overall, record quarter for the company, I want to thank our employees, customers, shareholders for their continued support and work. Their efforts have created one of the most profitable, reasonable banks in the country. Home ranks 19th of all 1,016 publicly traded banks in operating profit. We didn’t buy any stock this quarter because we’re kind of counting our money with $26 million trust payoff and keeping our rates for new deals. It may be time to take a look at our dividend. It appears that we are now below our target of 1.5%. Good earnings, plenty of capital, lots of opportunity should bode well per Home $3 in the near future. Randy?

Randy Mayor

Thank you, Johnny. Well, another first quarter and a New Year and we’re off to a very good start. Congratulations to all our employees. And as Johnny said, once again, this was the most profitable quarter in the history of our company reporting an ROA of 1.70% and an increase in earnings of $609,000 or 3.6% above our previously reported earnings.

That makes eight consecutive quarters of record earnings. I am also pleased and Johnny talked about this to announce that the conversion of our last acquisition is in process as we speak and to be completed this weekend. You may recall on our last call we had added to our corporation Premier Bank in Tallahassee in December and Heritage Bank in Tampa this past November.

And as I have said before, we believe the conversion is essential to the process of improving net income for these acquisitions. So we waste no time in getting it done. And in the case of these two acquisitions, we have been running three backroom operations since we acquired them. All conversions will be behind us with Heritage that was completed on March 8 and with Premier Bank to be completed this weekend. In addition with Premier, we will be also consolidating branches in Tallahassee, which will result in closing three or four allowing even more savings.

And let me say our conversion team does and continues to do what I feel like is one of the best jobs in the country in getting this job done. I want to congratulate them on a great job with Heritage and I’m very confident, we will see the same success this weekend with Premier. And on top of the conversion this week, a new loan production office was opened in Pensacola, Florida that we hope will soon become a full service branch upon regulatory approval.

I’m pleased to announce that we have added some organic growth with the local loan team that is already producing good results and a healthy pipeline. We have not had a presence in Pensacola, so we are very excited about getting three well-known bankers as we continue to fill our footprint.

And I would also like to announce that we will be opening a new branch at the very end of the second quarter in Seagrove, Florida right in the middle of the very busy area known as the 30A. If you’re not familiar, this stretch of beach coastline starts just outside of Sandestin and runs down through residential condo and retail establishments. This positions us with a real presence in the most active area of Panhandle.

We are extremely busy looking at bank’s another growth opportunities for the right strategic addition to our organization, as Johnny alluded to. So now let’s talk about the income and the key components of these record numbers. First of all, net income. The quarter net income was $17.5 million or $0.62 diluted earnings per common share compared to $16.9 million of net income or $0.60 diluted earnings per common share for the last quarter of 2012 and compared to $14.5 million of net income or $0.51 diluted earnings per common share for the same quarter of 2012, an increase of $3.1 million or 21%.

Diluted earnings per common share, excluding intangible amortization for the first quarter of 2013 was $0.64 compared to $0.52 diluted earnings per common share, excluding intangible amortization for the same period in 2012. As stated earlier, return on assets ended at 1.70% compared to 1.67% at 12/31/12 and 1.52% for the same quarter in 2012. Our ROA, excluding intangible amortization ended at 1.79% as compared to 1.75% at 12/31/12 and 1.60% for the same quarter in 2012. Core ROA that excludes intangibles, provision, merger expenses and taxes ended at 2.77%. Our return on average TCE excluding intangible amortization and it seems that I say that a lot, was 17.29% as compared to 3/31/12 at 15.03%.

Our Arkansas banks continue to produce high performance results and we’re very pleased with the progress from Florida and especially Alabama. In fact, just based upon our own internal numbers, we’re seeing ROA from Florida in excess of 1% and Alabama in excess of 1.5% on a year-to-date basis.

At the Centennial Bank level and on an internal analysis, 48% of all assets are in Arkansas, 5% of assets are in Alabama, and 47% of the assets are in Florida. With the concentration of assets in the Panhandle region, we now split the area into three new regions to allow more reporting of performance to each market President.

We’re very encouraged with the numbers that we’re seeing and we look forward to seeing what we can accomplish over the next three quarters in 2013.

As always, contributing to these great numbers was our ability to continue to control our expenses and improve throughout the year and last year. We ended the quarter with 46.03% efficiency ratio or improvement of 372 basis points from the same period of the previous year. We continue to be pleased with what we’re doing in this area.

In fact, I will now turn it over to Donna Townsell, our VP for Corporate Efficiency to give us a little update on some of the activities we have working. Donna?

Donna Townsell

Thank you, Randy. It is an accomplishment to state that our efficiency ratio has seen an improvement of 372 basis points over this quarter a year ago, considering that we’re still incurring some expenses due to acquisitions. And as you’ve heard, we have one more conversion to go this weekend and then we’ll see what kind of a number we can run. We have six B4 teams that are actively working about 195 action items.

This is the process of performing sales examination on our processes, efficiencies, and some revenue ideas. And while 46% efficiency ratio is pretty good, I’m sure, Mr. Allison would like it to be better. In fact, he is holding up his sign right now with a 40% on it and everyone in the room is rolling their eyes and smiling. So with that being said, we will not lose focus in this area.

Last quarter, we also mentioned that we would explore ideas for revenue generation. We are still evaluating those ideas and researching different companies in regards to a possible full blown revenue enhancement project that we want to be very judicious before incurring such an expense. The cost benefit analysis with the best return will likely be the program of choice or we might just handle it in-house. But either way, we will continue to look for ways to work smarter, increase revenue, and manage our expenses. Randy?

Randy Sims

Thank you, Donna, and thank you, Johnny for that 40%, little message there. I might get a three.

John Allison

Something of a three, it’s going to look good.

Randy Sims

Well, we’ll try to get to that 40% first.

Donna Townsell

One step at a time.

Randy Sims

Yes, one step at a time. Well, Donna, that is exciting news and we look forward to what these guys can accomplish and the teams accomplish this year, because it will definitely add to our bottom line.

Now, let’s switch to the most important component of our net income – net interest income and margin. Net interest income for the fourth quarter increased 21.4% to $44.3 million from $36.5 million during the first quarter of 2012. Net interest margin on a fully taxable basis remained strong and improved to 4.91% excluding the $2.2 million of additional yield due to the improvement in the FDIC loss sharing tools. This compares to 4.65% in the first quarter of 2012. Otherwise, as mentioned, our net interest margin on a fully taxable basis was 5.15%. And by the way the effective yield on a fully taxable equivalent basis on non-covered loans was 6.11% and on covered loans was 7.94%. Again, excluding the additional yield due to the improvement in the FDIC loss sharing tools.

Covered loans are now 13.4% of our total loan portfolio. The company reported non-interest income for the first quarter of $9 million as compared to $10 million in the first quarter of 2012. But included in the first quarter total was $2 million of amortization for the FDIC indemnification asset that lowered the more traditional non-interest income categories.

Switching to deposits, we ended the quarter at $3.47 billion compared to $3.48 million as of December 31, 2012. We continued to illuminate non-customer time deposits throughout the system of branches and we’ll do that same with our new acquisitions. Time deposits represented 36.8% of total deposits as of the first quarter end of 2012. At the end of this quarter, it was 25.6%, a vast improvement.

I will stop at this point and turn it over to our CFO, Randy Mayor to give a little more color on what we’ve just discussed. After that, Randy will pass it to Brian Davis to give us some more information on our capital numbers and other progress. So, let’s get started with Randy.

Randy Mayor

Thanks, Randy. We saw our return on assets improve 3 basis points for the quarter from 1.67% to 1.70%. Just to note, we did have the Heritage Bank acquisition for one additional month in the quarter compared to Q4 2012 and the Premier acquisition for two additional months in the quarter compared to Q4 2012.

As mentioned in the press release, there was some additional noise in Q1 due to the projected credit improvement in five of our FDIC loss sharing tools. This adjustment resulted in $2.2 million of it in additional interest income for the quarter and a reduction of $2.1 million in our non-interest income and an increase of $100,000 in our non-interest expense for the quarter.

The overall net impact was approximately $40,000 of expense in the quarter or $24,000 after-tax. Our net interest margin adjusted for positive impairment effects improved 5 basis points from 4.86% to 4.91%. Our core efficiency ratio increased slightly to 46.39%, mostly due to the extra expenses normally incurred in the first quarter such as employment related taxes.

In looking at our net interest margin, we experienced a change in the mix of our earning assets with approximately 50 more in average balances and the interest-bearing balances due from banks category in Q1 as opposed to Q4. Our loan yield improved from 6.03% to 6.11% on non-covered loans on an adjusted basis and from 7.83% to 7.94% on covered loans. The yield on covered loans including the positive impairment was 10.3%.

Our investment yield declined slightly from 2.77% to 2.69%. The cost of interest-bearing deposits improved from 0.43% to 0.37% and our overall cost of funds improved from 0.58% to 0.52%. Also, remember that we paid off $25 million in troughs with an average rate of 3.46% on March 26, which will provide benefit next quarter. Non-interest income adjusted for the positive impairment impact of Q1 2013 and the gain on acquisitions in Q4 of 2012 improved to $143,000 on a linked quarter basis.

We did have proceeds from life insurance in Q1 of 2013 but the impact was offset on a linked quarter basis by the special dividend we received on a venture capital investment in Q4 of 2012.

Non-interest expense adjusted for merger expenses increased $1.43 million, mostly due to the inclusion of the Heritage and Premier expenses for the full quarter. Overall, it was a strong quarter for the company with EPS of $0.62 and return on assets of 1.70%.

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

Brian Davis

Thanks, Randy. During the first quarter of 2013, we paid out dividends of $3.7 million and have retained earnings of $13.8 million. However, we did pay off $25 million of our trust preferred securities. For our Q1 2013, our leverage ratio was 10.4% compared to 10.9% at year-end. Tier 1 was 13.8% compared to 13.9% at 12/31 and the total risk-based capital was 15.0% compared to 15.2% at year-end. These slight decreases were expected as a result of paying off the $25 million of our trust during the first quarter of 2013.

Additionally, book value per common share was $18.79 compared to $18.34 at 12/31, tangible book value per common share was $15.35 compared to $14.86 at 12/31 and the TCE ratio was 10.5% compared to 10.1% at 12/31.

Randy?

Randy Sims

Thank you, Brian. It was a very good quarter on the loan side too. Our asset quality metrics has some improvement in already strong numbers and we are seeing a healthy loan pipeline going into the second quarter.

With that said, I am now going to turn it over to our Chief Lending Officer, Kevin Hester, who will give us some more information.

Kevin Hester

Thanks, Randy. As you mentioned, we’re pleased to report continued improvement in overall asset quality in the first quarter. Our non-covered non-performing asset ratio decreased slightly from 1.30% to 1.21% as did our non-covered non-performing loan ratio from 1.17% to 1.12%. This improvement continued to trend that was in place prior to the fourth quarter 2012 acquisitions in Tallahassee and Tampa.

Our allowance for loan losses, as a percentage of non-covered loans, declined slightly from 1.94% to 1.83%. However, if you add a division Premier and Heritage acquisition discounts to the allowance for loan losses, the combined figure would be 5.13% of non-covered loans at March 31, 2013. The allowance for loan loss coverage ratios stayed virtually constant at 164%, reflecting continued strong coverage of our non-covered, non-performing loans.

Non-covered real estate owned decreased from $20.4 million to $18.9 million this quarter and the share related Arkansas properties increased from 60% to 65% on a linked quarter basis. Net charge-offs were 50 basis points in the first quarter, which is just above our average for the four previous quarters, but below the 61 basis points incurred in the previous quarter.

From a loan growth perspective, the first quarter is historically weak compared to the other quarters and this year appears to be following suit. However, late in the quarter, we saw an improvement in our loan pipeline and that improvement is continuing into the second quarter. All the regions were contributing to this improvement.

However, this optimism must be tempered by the continued lack of pricing discipline shown by our competitors both big and small. Anecdotal evidence from our lenders indicates that no region is immune to the epidemic. And we’re fighting hard to maintain an increased market share while not causing serious damage to the net interest margin.

We continue to experience strong results from our secondary mortgage operation. And our mix of purchase versus refinance is better than the industry average, which is encouraging for long-term success in this area. We are seeing some price improvement in most of our Florida and Alabama residential markets and that’s driving this positive mix. We continued to add experienced residential loan originators in our Florida and Alabama markets and anticipate this will become a more important segment in that region.

I’d like to welcome the experienced lending staff that we hired in Pensacola and I’d also like to take this opportunity to thank our entire lending staff for their continued business development effort that has put us into position to capitalize on an improving economy in our markets.

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

Randy Sims

Thank you, Kevin. Well, a great start for the year in all respects. Record income for the eighth consecutive quarter; hope to say nine next quarter. All conversions almost behind us, new branches opening and some duplicates are closing. I’m looking forward to the second quarter to see what we can accomplish.

I will now turn it over to our Chairman, Mr. Allison.

John Allison

Thank you, Randy. I thank all you all for reporting this morning. And Amy, I think we’re ready for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Michael Rose at Raymond James.

Michael Rose – Raymond James

Hey. Good afternoon, guys. How are you?

John Allison

Great. How are you, Michael?

Michael Rose – Raymond James

Good. You mentioned some potential M&A opportunities. Will those be in-market or are you guys looking outside of Florida at this point?

John Allison

No. We’re going to stay in our lane. We’re not going to get outside of our lane. We know Florida and we know Arkansas. And we’re learning a little bit about South Alabama. So we’re going to stay in those markets. And there are, as I said, in my opening remarks, there are numerous opportunities in both those markets.

Michael Rose – Raymond James

Okay. And then if you could just remind me how much you could add in incremental assets with your capital base roughly?

John Allison

Well that depends on where you want to take TCE to. It depends on where you want to go to, but I’d like – Brian can probably answer that. I wouldn’t be afraid to go to $3 billion. If there was a $3 billion deal out there that might stretch us a little bit, but it’s a right transaction. We might go that far. That’s probably about the top of it, without having to go and raise some capital.

Michael Rose – Raymond James

Okay. Thank you.

John Allison

Thank you.

Operator

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

Jon Arfstrom – RBC Capital Markets

Hey, good afternoon, everyone.

John Allison

Hi, Jon.

Jon Arfstrom – RBC Capital Markets

Just as long as the M&A topic was broached, I’ll just ask a couple more questions on that. How do you prioritize the potential targets and just some of the key attributes you’re looking for? It sounds like maybe it’s the pace of potential has picked up and I’m just curious how you say yes this is interesting, no, this is not?

John Allison

Well. I’ll let Randy speak to this too. But geographically, if it fits our footprint and we can generate some call sites and then that gets our attention. For instance, we’re on the West Coast, we’re not on the East Coast to Florida, if there was something came up on the East Coast to Florida, and we want it to be in that market, we probably would cash their net to that side. And it gets down to – is it a real franchise, can it really make money? There’s a lot of – over the years, a lot of franchises were formed that are really nonexistent. How bad is the balance sheet? How long will it take us to fix it? Can we grow loans in that market?

And a big part of it’s got the willingness of the seller too, how willing are they, and are they realistic in pricing? And can we make an accretive deal because as many deals there is at least 14 in Florida right now. As many deals as there are out there, you got to find out who is the most realistic and which one of those deals makes the sense, most sense. And so, we prioritized into seven right now. I’ll see seven next week. I’ll visit with their management team, some of the Boards, and we’ll see what comes out of that meeting. We’ve gone from 14 to seven and we’ll talk to that seven and we’ll decide from there. Randall Sims, you’ve got any comment on that?

Randy Sims

I don’t know that I can add too much to that, but all those factors play into whether or not we’re really interested in it. Probably, footprint may be one of the most important willingness to sell is probably right up there with footprint. But another factor that maybe Johnny didn’t mention is, how does it fit with us. Are we getting the management team, are there other assets such as a really active management team that’s going to take us somewhere that that is kind of an intangible.

We might pay a little bit more for something like that. So it’s all over the board. So you got to look at a bunch of them before you can really get down to someone that really fits well with you. And as Johnny said, we’re looking at seven next week. In one week, we’re going to be looking at a bunch of them.

John Allison

Interesting. I would – John, I have one more comment. I visited one-on-one with the CEO of about a good size, little short of $1 billion, between I’d say from it’s about $500 million bank last week or a week before last. And he said, of all the people I’m talking to, you have the best stock. And he said, yours is the best. And he said, I really – I’m going to tell you that our Board were really interested in your stock.

And I said, you know why you’re interested in our stock, and he said, it’s a good stock. And I said, it’s a good stock because we do good deals. We do smart deals for that’s in the best interest of our shareholders that are accretive in markets that we want to do. And I said, you’re not realistic on your part, so we’re not going to able to get together. He said, would you pay so X number of dollars? And I said that’s not going to happen. And he said, well, would you pay X number of dollars? I said that’s not going to happen.

You just need to get realistic, because at the end of the day, when we sign the papers, I said I’m on the road selling this deal and it’s got to be good for the buyer and the seller. And if it’s good for the buyer and the seller then the stock goes up and everybody gets rewarded. And I said if it’s not, then the stock goes down and we’re not going to do one of those deals. I think you’ve heard kind of the – kind of how we think about them.

Jon Arfstrom – RBC Capital Markets

Yeah. That makes sense. And then just one question from the earlier comments about Pensacola. Can you talk a little bit about the early progress you’ve made in Pensacola and what do you think is possible for that market? I see Pensacola and Tallahassee as pretty big opportunities, but let’s just talk about Pensacola.

Randy Sims

Well, we stumbled upon three people that we’re looking to move out of their existing bank, one that was kind of closing down branches. And so we picked them up and they’ve been currently working out of our Navarre Beach location. So because we really didn’t have anything approved at the time. And the results are really good of them moving their customers over to our Navarre Beach location, which is about 30 minutes from that away. We are – we have found a location. It will be a temporary location. We’ll start it as a loan production office. Their pipeline, just in the short period of time is over $5 million and just coming in.

And that’s just a real good example of the fact that if you get an experienced loan team, then maybe you can make some pretty quick progress, but we see really good things out of this, and may use this as a model in other areas that we want to fill in, especially if the FDIC transactions kind of dry up and we don’t see a lot of them. I don’t know whether that answers your question or not, but we’ve got three people. They’re performing well. They’ve got a pipeline going. They’ve opened up 114 checking accounts. It looks good right now.

Jon Arfstrom – RBC Capital Markets

Okay. Yeah, that’s helpful. And so at this point, it’s a de novo plan for Pensacola?

Randy Sims

Yes, sir.

Jon Arfstrom – RBC Capital Markets

Okay. Thank you.

Operator

Our next question comes from Joe Fenech at Sandler O’Neill.

Joe Fenech – Sandler O’Neill

Good morning – good afternoon. Jon just asked one of my questions on M&A, but just another quick one here. You mentioned a potential seller, Johnny, that you were talking to and cited your currency as an advantage for you guys. What’s your sense for how these sellers, or whether or not these sellers are noticing some of these deals in the southeast and whether or not they are considering that more than they used to, or is it still that the buyer hits the price gets the deal? So just wondering if the seller’s perception is changing as you see the buyer’s stock price going up in some of these deals?

John Allison

I think it is a little bit that we’re trying to help that because and I gave the example that I traded in my last life for region stock at $40 that went to $2. So I said that, you need to pay attention to the currency that you’re taking. And I said, there are – he mentioned some by the competitors currency and I said you might as well stay independent, because you know what you have here and if we can’t get together, you might as well stay independent. So I think they’re paying a lot more attention to that Joe than they have in past years and we’re trying to help them.

We have, in this one particular example, we will compete against another bank in a market transaction. So we showed the 10-year performance of their stock versus the 10-year performance of our stock. I mean it is shocking. It’s back to the old story, they said, well so and so is doing what you all are doing, Johnny, they’re kind of cobbling up these banks and they’re going to run at 150 ROA or 160 ROA. And I said have they ever run one in their lifetime? They said, no. And I said, well, they probably never will then.

So you take a stock, it’s been a poor performer for 10 years. It’s probably going to remain a poor performer for 10 more years. I mean they may raise some as the markets rise. They may rise their multiple up maybe as the market does. I think the multiples are going to expand over the next two to three years. So I think that may all come up some, but I mean it is what it is and if – I learned that lesson last time, if we ever tried again, we’ll know exactly who we’re trading to and when we’re trading. So Randy, you got a comment on that?

Randy Sims

No, I mean it’s exactly what you said. We’re just – I think that the ones that want to join up with us get a real value with our stock and I’m excited about what’s down the road for us. I think people are paying a lot more attention to that and who they join up with. And so it’s – I think it’s going to be good. The rest of the year could be good if we add two banks, that’s our goal. If we add more, it’s going to be great.

John Allison

You know, we’ll add something, Joe, I don’t know what that is right now. There is – I’ll know a lot better next week, but we’re going to add something. At least we’re going to be in there pitching pretty hard. But if the deals are right, we’ll do them and if the deals are not right, we won’t do. And some of these deals you get into, we got into – we’re in one right now, it’s a larger deal and you bring in, they got goodwill under books and it creates little goodwill and you really have to evaluate those deals. And I’m going to be talking to you guys and some of our investors about how they feel about goodwill and return on goodwill over a period of time.

So kind of getting the feel we have been extremely protective by our tangible common equity and we haven’t – it hasn’t appeared to have changed – impacted anyone’s prices or stock, but I think it will at some point in time. So anyway, I might call Sally Pope, too. She is the one who gave me my first lesson on that years ago.

Joe Fenech – Sandler O’Neill

Okay. And then a question on a different topic for Johnny or Kevin. I guess you guys noted an improvement in the loan pipeline, is that a pickup in the economy or is it market share gains in some of your newer markets? What do you mostly attribute that to here?

Kevin Hester

I think it’s going to be – so this is Kevin. It’s going to be some of both. In some of our newer markets it’s going to be market share and in some of our existing markets, it’s an improvement. We’re seeing – in Florida, we’re seeing a lot of opportunities.

Joe Fenech – Sandler O’Neill

Okay.

John Allison

We approved – Joe, we approved, we just left the loan committee prior to this call. We approved $18 million at loan committee. Doesn’t mean we’ll get all of those. We approved $18 million, and of that, about $12 million was in Florida. We have coming next week about $15 million and $15 million to $16 million coming out of Florida. So, it’s picking up. Florida is really picking up and particularly the Keys. If you’re not making money in the Florida Keys now, you’re not ever going to make the money because it is as good as I’ve ever seen it, the traffic and the restaurants and hotels and motels. It is extremely strong.

Joe Fenech – Sandler O’Neill

Okay and then on the expense side, I know Donna you’re still working to quantify a lot of these potential benefits. But just from the conversions and the branch consolidations that you’re planning, can you quantify the savings you’re anticipating there?

John Allison

You want to know how much to add to EPS?

Joe Fenech – Sandler O’Neill

Yup.

Donna Townsell

It’s predicted to be about $1 million, Joe.

Joe Fenech – Sandler O’Neill

A $1 million annually for everything, the conversions and the branch closures?

John Allison

That’s all. We’re given out.

Joe Fenech – Sandler O’Neill

Okay.

John Allison

I disagree with you. You had 48% in your note – I appreciate your note. But you showed 48% efficiency ratio and we’re showing a 46%. What’s the difference?

Joe Fenech – Sandler O’Neill

I had pulled out the life insurance proceeds from that, but I’ll – we decided to leave it in the core numbers, but I didn’t pull it out of the efficiency. So we’ll correct that in the follow-up.

John Allison

That’s become a line of business for us of growth in the fourth quarter, if you wanted it.

Joe Fenech – Sandler O’Neill

Thanks, guys.

John Allison

All right. Thanks.

Operator

(Operator Instructions). And our next question comes from Matt Olney from Stephens.

Matt Olney – Stephens

Hi, guys, good afternoon.

Randy Sims

Hi, Matt.

Matt Olney – Stephens

Hey, most of my questions have already been addressed, so thank you for that. On the margin, probably more of a Randy Mayor question. It looked like the yield on the non-covered loan book picked up a little bit. Any color on that? And then bigger picture, how should we be thinking about the margin going forward from here?

Randy Mayor

It’s – some of that is coming from our acquired non-coverage groups that we put in, in for the quarter. So – but as far as the overall margin goes, probably have a little bit more room on the time deposit side. As Randy said, we continue to strive to lower our percentage of deposits that are in time deposits and by lowering those rates. We still struggle on the loan side with the rate competition out there. And as we talked about a little bit – we get a little bit of help from the payoff of our trust. They were at 3.46%. So I don’t expect it to expand anymore unless there is something to do with the non-accretion adjustment or something like that or we had a new acquisition. I would say it’s steady to down a little bit.

Randy Sims

Yeah. One more piece of color on that, the Premier and Heritage transaction is the reason that non-covered loans yields up and they were booked with anticipated yields of about 7% when you combine the two.

Matt Olney – Stephens

Okay. That’s helpful, guys. And I appreciate it. Great quarter.

John Allison

You bet. Thanks, Matt. Appreciate your sport.

Operator

Our next question comes from Brian Martin at FIG Partners.

Brian Martin – FIG Partners

Hey, guys, Matt just asked one of mine. But the second one was, Johnny, with regard to the M&A landscape, I guess two things. We’ve heard recently from a few people that the bid ask spread between these buyers and sellers is beginning to narrow. Just, kind of, wondering your thought on that? And then just secondly, these people you brought aboard in Pensacola, how much opportunity is there for you to go down that path and just bring people on organically versus doing an acquisition per se? And I guess how are you evaluating that scenario? Are these people just coming to you? Are you out looking?

John Allison

Little of both. It – we haven’t done that in the past. That hadn’t been our game in the past and this is kind of exploratory with me is to watch this. But I’m extremely pleased with what I’ve seen thus far. These people know their customers and they came from another financial institution that was in that area for a while. So they’re not rookies, they’re experienced people. And I think that looks – bodes really well for us right now. Randy, any other comments?

Randy Mayor

Well, I would add to that where in the same band we’re adding six or seven mortgage originators up and down that Panhandle, both Alabama and Florida. So we’re seeing some people come to us now that that can bring some business and can really generate some things for us. So if we really feel good about the person and they fit in, we’ll continue to look for some organic growth just as we’ve done in Pensacola and just as we’ve done in beefing up our mortgage origination team.

John Allison

And back to your first question on the bid, Matt, I think they’re getting more realistic. I think the world sees – I think, I commented before about tired boards and tired management, I think there was a lot of that out there and they’re thinking this is an opportunity – and our stock was good too. I mean, the people that we’ve talked to have – they check this out and looked at it and – I have to say, we have a premier opportunity in the State of Florida. When you look at the acquirers in there, there are active acquirers in that market. Who is there? Who is there with a good currency other than Home Bancshares.

I think it makes a lot of sense. If I were sitting on the seller side, I’d be taking a strong look at Home Bancshares than being the small reasonable regional bank that lets them have a little autonomy, but expect performance out of their company and expects return on the stock and reward to shareholders. So that’s kind of how I’m looking at it. We’ll see if that works out. Week after next, I can tell you a lot more in if you want to call me.

Brian Martin – FIG Partners

All right. I appreciate it. Thanks, Johnny.

John Allison

All right Brian.

Operator

Our next question comes from Kevin Reynolds at Wunderlich.

Kevin Reynolds – Wunderlich

Good afternoon, Johnny. How are you?

John Allison

Hi, Kevin, how are you?

Kevin Reynolds – Wunderlich

I’m doing great. When are you going to be available the week after next, so that we can call you and get that information?

John Allison

Call me the second Tuesday next week at 4 o’clock.

Kevin Reynolds – Wunderlich

The second Tuesday of next week, I’ll mark that down.

John Allison

We’re leaving Wednesday. We’re going to be in the airplane Wednesday, traveling Wednesday, Thursday and Friday. So, we’ll see that works.

Kevin Reynolds – Wunderlich

Okay, okay. Most of my questions have been answered, or asked and answered. I did have one question, and you may have gone through this already. You talk about price competition out there. Have you noticed a difference between, say, banks that are bigger than you, the big regional banks or the smaller banks in terms of who is becoming more or less rational or irrational out there as you went through the first quarter?

Randy Mayor

Are you talking about on the sales side or are you talking about the loan pricing?

Kevin Reynolds – Wunderlich

I’m sorry. I skipped – yeah, on the loan side. Are you seeing – has there been a change in pricing behavior as you went through the first quarter and do you notice any changes that are – are they more skewed to sort of the bigger banks or the smaller banks out there, if they are at all?

Randy Mayor

As Kevin says – Kevin said – there is – it’s both big and small. The bigger ones are probably some of the worst at it and go the lowest, but I mean, we’re seeing both bigger than us and smaller than us. It’s both.

John Allison

Yeah, we have a local competitor. I mean we don’t – I don’t even know what a 2% looks like, and we had quote yesterday from one of our loans, a guy is quoting in the 2% and fixing it for a while. You just shake – you back up and shake your head about that stuff. There is not a lot of growth in Arkansas. So they are kind of stealing from each other. Where we’re seeing our growth is coming out of our Florida operations and our Alabama operations and they’ve – and by the way all of them ran over – I think every one of them ran over 1% ROA. Last quarter ran at about 1.10% last quarter, is that right? Alabama run at – about 1.5%.

So those banks are improving and growing. Our people are out doing a pretty good job generating some business, generating some loans. So that’s a good place to be. We’ve got the core engine running in Arkansas as strong as Austin and Florida is bringing home the bacon right now. So, good opportunities there.

Randy Mayor

Just to add to your question. One of the things that it seems to be a pattern is, especially in the bigger banks is, if it fits within their little box, their box of the type of loans that they won’t, then they go to some ridiculous pricing. And it doesn’t matter if it’s outside the box then it’s pricing that’s reasonable. But if it’s within their box of what they really want and what the examiners, I guess, really want to see out of it, then it’s a really hard battle and the pricing is just really out there.

John Allison

One final comment that I want to say to the Street. People that are booking long-term, low fixed-rate loans are selling the future and that’s going on. I mean, I know the loan growth, we can brag and beat ourselves on the chest and run around the table, talk about how well we’re doing on loan growth. But where we’re getting it, what are we paying for it and how much risk are we taking is a scary thing to me. We’re too disciplined to do that, we’re not going to play the game.

We matched one. We don’t have to match the one it was in the 2%s we got it, we got the loan a lot higher than that but you just got to send word back to them that you’re not going to let them steal your good customer. So those guys don’t have any market share and they’re trying to steal some in what they’re paying for. And some of these are public companies that are doing some things that’s just are ridiculous.

So, anyway, we’ll continue to remain disciplined in doing what we’re doing. We take loans one-on-one. We look at everything. Randy Sims and I still approve the loans as we used to in the past on rate. And if there’s anything – any change in rate, it has to come to me still. So we’re not throwing away the credit card, we’re doing it – we’re in for our margin. And so far, we’ve been getting it. And by the way, Randy Mayor said margin, he thought, it’d go down. You all have never heard that from him before. Have you in the past 10 years? Never before Anyway, it probably is that region. That’s all I got. Thanks, Kevin.

Kevin Reynolds – Wunderlich

All right. Thanks John.

Operator

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

John Allison

Thank you for your support. Again, I appreciate it. We’ll be talking here in 90 days. Hopefully, we’ll have some good news for you, some deals to announce, as many as we have out there today, it appears it will have something going on. Even the improvement as Donna’s team continues to work on the efficiency side with the payoffs and the conversions coming in, we’ll payoff – one thing, we’ll payoff – we have maturity on some federal home loan about $15 million in June.

We’ll probably pre-pay a $10 million December 1. Those are in the – we didn’t payoff that $3 million trust preferred at 2.03%. We’re going to pay these off because they are at quite a bit higher rates than that. So that will give us a little savings too. But we streamlined the balance sheet, it’s time for little loan growth and maybe a deal that makes some sense.

It is – I think $2.50, if something blowup, I think we got our $2.50, and my eyes on the $3 ball, so hopefully you will see that coming or given some at least maybe by the next – in the next quarter I can tell you how I think we’re going to get to it.

Again thanks for your support. And we’ll talk to you later.

Operator

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

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