Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Randall Sims - Chief Executive Officer

John Allison - Chairman of the Board

Ron Strother - President, Chief Operating Officer & Director

Randy Mayor - Chief Financial Officer & Treasurer

Brian Davis - Director of Financial Reporting

Analysts

John Arfstrom - RBC Capital Market

Andy Stapp - B. Riley

Joe Finnick - Sandler O’Neil

Matt Olney - Stephens Inc.

Dave Bishop - Stiefel Nichols

Mark Muth - Howe Barnes Hoefer & Arnett

Chris Owens - [Kaft]

Joe Steven - Steven Capital

Home BancShares, Inc. (HOMB) Q3 2009 Earnings Call October 15, 2009 2:00 PM ET

Operator

Greetings ladies and gentlemen, welcome to the Home BancShare Incorporated third quarter 2009 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks and then entertain questions. (Operator Instructions)

The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in March of 2009. At this time all participants are in listen-only mode and this conference is being recorded. (Operator Instructions)

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

John Allison

Good afternoon and welcome to Home BancShares third quarter earnings release and conference call. Participating with me today in the call will be Randall Sims, Chief Executive Officer; Ron Strother, Chief Operating Officer; Randy Mayor, Chief Financial Officer; and Brian Davis, Director of Financial Reporting.

First we’d like to start off by thanking the investment community for favoring us with more than $100 million in new capital. In mid September, our management team hit the road and was able to tell our story in face-to-face meetings to a world class group of institutional investors.

After two days of meetings, the group subscribed for almost $450, an over subscription of five times for our offer. We’re truly humbled and appreciative. We have been good stewards of our recent appeal proceeds and expect to continue to do the same with our new capital as we search for the best opportunities to deploy that capital.

For the first time in the several quarters, we finally have one without a lot of noise. No one-time gains, no consolidation expenses, no special assessments, no bond sales, just a good solid clean quarter. The consolidation on our charter along with the 250 initiatives for all practical purposes have been completed.

We announced in the second quarter strong income improvements from the first quarter to the second quarter about 1.6 million, and I’m telling you today that that has continued and Randy will talk more about that in the future. We are doing exactly what we told you we would do.

We’re enjoying good asset quality, and improving efficiency ratio and increasing net interest margins, healthy reserves and a fortress capital position. Such a capital position as to run Home BancShares, number one of publicly traded companies over $500 million with the tangible capital common equity ratio of over 13%.

Now I’d like to turn the presentation over to our new CEO, Randall Sims and the rest of the management team for their thoughts. Randy.

Randall Sims

Thank you. This is a special time for Home BancShares, and we are excited about some very good results for the third quarter. We reported at the end of the second quarter record results in our margin, net interest income as well as our efficiency ratio.

I’m pleased to announce the momentum has continued, and once again we have experience record results for the third quarter. I will get started and then we will hear more from Randy Mayor, our CFO on margin and from Ron Strother our Chief Operating Officer Home Loans.

From a quarter-over-quarter perspective, our net income increased $675,000 to $7.2 million. Diluted EPS remained unchanged at $0.32. Cash earnings were also up about the same to $7.5 million with cash diluted EPS of $0.33, down a penny but really due to rounding.

Net income on a lean quarter basis had marked improvement up $1.8 million from $5.4 million to $7.2 million that is a 134% improvement on an annualized change. Diluted EPS reflected that same improvement, moving up $0.08 from $0.24 to $0.32. Cash earnings were also at $1.8 million on a lean quarter basis to $7.5 million, again resulting in $0.08 improvement to $0.33.

We were very pleased with these results, especially on a lean quarter basis. This improvement in net income was the direct result of our ability to increase margin while controlling expenses.

From a quarter-to-quarter standpoint, our margin was up 44 basis points from 3.82% to 4.26%. On a lean quarter basis, margin was up 18 basis points from 4.08%. Due to this margin improvement we were able to realize an increase of $1.8 million in net interest income on a quarter-over-quarter period and $955,000 on a lean quarter basis.

If you remember, our goal was to break 4% with our margin, and we have surpassed that goal. 4.26% is an all time record for Home BancShares. Will this continue to improve? We anticipate some weakening for the next quarter due to our recent stock issuance. However, we continue to see opportunity on both sides of the balance sheet.

Non interest income did not improve this quarter, but was still strong. Looking at a quarter-to-quarter basis it was down $183,000 from $7.8 million to $7.6 million. On a lean quarter, it was down from $8 million. Season service charges were still strong, but the corporation did experience a slower quarter in mortgage origination.

As we reported last quarter, the completion of our charter consolidations plus the implementation of the initiatives from our efficiency study remained build-a-better bank corp B3 produced record results at the end of June in driving down our non-interest expenses.

Again we continue to see very encouraging results for this quarter end with non-interest expense improving over $1.4 million quarter-over-quarter, and $3.2 million on a lean quarter basis from $20.3 million.

Admittedly, the second quarter included non-reoccurring expenses such as the FDIC assessment, but when you throw those amounts out we improved over $1.2 million in core non-interest expense.

Consider the combined improvement of our margins, plus non-interest expense and you can see where we’re headed, a very strong efficiency ratio. I am very proud to again announce an all time record for Home BancShares of a core efficiency ratio of 50.15% for the month of September.

Our Chairman has asked for something within a four in it and we can see from the trends we are very, very close. I guess the real question would be whether or not he’ll be satisfied. We probably set another goal as you all know him.

This efficiency ratio improved over 781 basis points on a quarter-over-quarter, dropping from 59.25% to 51.44%, and that drop was improvement of our 1130 basis points on a lean quarter basis from 62.7%. The core trend is quite remarkable going back to March month end at 59.7% to June at 56.2%, and 53.1% for August as we disclosed in the stock perspectives. Then we see a core efficiency of 50% for the month of September.

It started in the second quarter with overall improvement in margin, non-interest income and core non-interest expenses of almost $1.6 million, and the momentum has continued in the third quarter, and we’ve seen improvement of $1.7 million.

As we’ve said in prior calls, we are anxious to see our run rates for the fourth quarter. We feel this would be a good indication of our potential, and we anticipate some improvement over the third quarter as the final efficiency initiatives are completed, but certainly not at the same pace of prior months.

Improvement in our metrics has produced an ROI on a quarter-over-quarter basis of 1.12% from 1%, and an improvement of 28 basis points on a lean quarter from 0.84%. Cash ROI on a quarter-over-quarter improved 12 basis points to 1.19 and the same 28 basis points from 0.91 on a lean quarter.

These improvements have allowed us to meet net income goals and fund our provision for loan loss as we continue to clean up Florida. On a quarter-over-quarter, our provision was up $2.1 million from $1.4 million as of 9/30 ‘08 and to $3.6 million for 9/30 ‘09. On a lean quarter basis we were still up 800,000 from a strong provision in the second quarter.

As a comparison to loans, our reserve is up 24 basis points quarter-over-quarter and down a little on a lean quarter, but still very strong at 2.09%. Growth and loans was mixed ending at $1.97 billion with growth of $3 million on a quarter-over-quarter and a drop of $2 million on a lean quarter basis.

Deposits dropped from $1.91 billion on a quarter-over-quarter and from $1.83 billion on a lean quarter to $1.78 billion increasing our loan to deposit ratio from 102% on a quarter-over-quarter, and a 107% on a lean quarter, so ending 110%.

While this ratio has continued to grow and our deposits drop, our strategy has been to protect our core customer deposits, but to also continue to take advantage of wholesale pricing. We have not chased the higher cost of public funds and non-core customer time deposits.

As I pointed out, this has made a mark difference in the growth of our margins, and of course liquidity has not been a problem due to our stock issuance and capital ratios. Our total common equity increased to $106 million on a quarter-over-quarter and $103 million on a lean quarter to $397 million resulting in very strong capital ratios.

Turning to asset quality, our non-performing loans and asset ratios, both increased 94 basis points on a quarter-over-quarter basis. On a lean quarter basis non-performing loans decreased 3 basis points to 1.76%, and non-performing assets remained the same at 2.05%. Non-performing assets is disclosed in the stock perspectives as of 831 with 2.25%. So it’s very encouraging to see that that dropped to 2.05 at quarter end.

That pretty well covers most of the numbers, and I will turn it over to Randy Mayor to tell us a little bit more on the margin. As our Chairman has said before, Randy has been predicting a drop in margin for about five straight years, and I think he might finally be right this next quarter due to the pressure from our stock issuance.

Randy tell us more about margin.

Randy Mayor

Thanks Randy, once again we saw a nice improvement in the net interest margin for the quarter. Up to 4.26 from 4.08 in the Q2. Loan yields improved 7 basis points with somewhat improvement attributed to lower non accrual interest for the quarter, while liability yields improved 11 basis points with the majority of improvement coming from time deposits which recorded at 22 basis points improvement.

Given the additional stock offering proceeds, relatively less flat loan growth and our current liquidity positions we are containing our strategy of utilizing the most effective funding sources as not to disturb or cannibalize our existing deposit base.

This strategy has resulted in a reduction of our time deposit balances. However the majority of this decline has been in the area of public funds and bid CDs. We continue to use the strategy of working each loan and deposit to attain the best rates possible while maintaining and building core deposit relationship.

As Randy mentioned, we do anticipate there will be pressure on the margin for the next quarter as we work through to pulling the proceeds of our offering. As example, a worst case scenario if you added $100 million from the proceeds at a 25 basis points it could be an impact of 17 basis points on our margin for the next quarter.

Randy that’s my comment.

Randall Sims

Thank you. We will now turn to more detail on loans from Ron Strother our President and Chief Operating Officer. Ron.

Ron Strother

Thanks Randy. Let me touch on loan volume first. As Randy pointed out, our loans have shown little growth over the past year. Loans have held steady at about $1.97 billion that’s Q3 ‘08, Q2 ‘09, and Q3 ‘09. However, I want to point out, it takes significant funding to cover the pay offs and portfolio this large. Maintaining this level of volume is significant in this economic environment.

To touch on mix for a second, while real estate loans have held consistent at about 82.4% of the portfolio, total loans in Florida actually went down about $8.6 million for the quarter, while loans in Arkansas increased about $7 million. Florida loans now represent about 16% of our total portfolio, but still about 68% of our NPAs.

Let me turn to asset quality, Randall Sims has touched on a few of these. Non-performing loans at 6/30 ‘09 was 1.79, they had gone down three VP to 1.76, but what I would tell you at 8/31 is we went on the road they were 2.10. Also non-performing assets were flat at 2.05, but they two were down from 8/31 ‘09 at 2.25.

Touch on charge-offs for a second, in Q3 ‘09 they were $4.144 million of which $3.9 million was predominately Florida and about $200,000 was in overdrafts. The allowance, it went down slightly from a 2.12 at 6/30 to 2.09 at 9/30, however as I just pointed out MPL showed some improvement for the quarter also.

I’m going to giving you a little color on MPAs. We actually had a non-performing credit go from OREO to sold in about a three week period. Unfortunately, it bridged the quarter end. So OREO or NPAs are actually down slightly now from the 9/30 ‘09 number.

We have demonstrated once again that when we get through the legal process and get control of the property, we can conclude the liquidation process.

As Johnny told you on the road, the [ebon] flow of the collection process is continuing. On OREO, it looks like we call the value is about right, and the net effect of the liquidations in Q3 ‘09 was about $4000 gain. It’s our view that recognizing the fair market value and the liquidation value of the properties going into OREO is the key.

Randy, that concludes my loan remarks.

Randall Sims

Thank you, Ron. That pretty much covers our report. I will turn it back over to our Chairman to sum up the results of the third quarter. Johnny what did we leave out.

John Allison

Well, I don’t think you left anything out. I think it was a good report. We talked in the second quarter that we might be seeing Florida head towards a peak. We didn’t call the peak until we said in the first quarter ten we thought really the skies would clear, but as you can see I’m not calling the peak now, but we did see from August market improvement as Ron stated to September, and non-performing has tick down.

So they maybe somewhere in August realm, by may have going up. I just in summary want to say it was a great quarter. We talk about records, records, records we ended up with a record third quarter net income, record efficiency ratio and improving, and as Randy said we showed a 50.15, I think for the month of September.

We came out for the quarter at about what guys, 52, 53? Efficiency ratio. So, we can see marked improvements there. If that holds maybe we’ll get to see it fore handle and pushing in that way and hopefully they’ll get us something with the four in front of it.

Record net interest income, we continue to maintain strong loan loss reserves and net interest margin, the strongest we’ve ever headed in the company another record at 426. As Randy and Randy both said, probably we’ll see a little pressure on there over the next quarter.

Continue to operating and one of the best [inaudible] in the country, and obviously a fortress capital position, probably the best in the country on the tangible common equity. As Randy said, and I’ve told you over the past several quarter look for the fourth quarter run rate, we think it will be good.

At this time we would open it up for question and answers.

Question-And-Answers Session

Operator

(Operator Instructions). Your first question comes from John Arfstrom - RBC Capital Market.

John Arfstrom - RBC Capital Market

May be a question from Randy Mayor first, on the margin you talked about the worst case scenario, 17 basis points of pressure and my guess is there are things you can do to mitigate that and offset some of that, and I am just wondering if you can maybe walk us through with some of the options are to mitigate some of the pressure?

Randy Mayor

We are looking at that John, and some of it is that we will do some short-term investing to get a better yield on there. We do have some FHLB borrowings that are coming due that we would be able to replace. So, that’s kind of what I’ve said was a worst case scenario. So hopefully we would be able to mitigate that some by deploying it elsewhere.

John Arfstrom - RBC Capital Market

Okay. Ron, you probably talked about the charge-off numbers, and I’m okay with math, but it seems like when I added up you didn’t have any charge-offs in Arkansas maybe negligible. Wondering if you can touch on the health of Arkansas because it seems pretty solid and then maybe contrast it with some of REO and NPL flows that you are seeing in and out of the portfolio in Florida?

Ron Strother

Some of these, I want to point out first that we had had some provisions John, I want to take you back to 12/31 ‘08 and if it was a non-performing then we charged it off. If it was performing, we put some provisions in, so a fairly large portion of what we actually took the charges on was in the provisions.

That the charge-offs for the quarter of the $4,144 million that was about performing 491 gross, we had collections of about 300,000, but Arkansas actually led the charge-offs and there was about $2.488 million in Arkansas, the vast preponderance of that was put out back at 12/31 ‘08 in a specific provision and in Florida, it was about $1.6 million.

Florida, we tend to look at the value of the property, as you know if it goes anemic and before we take it into OREO, we will get those things valued, if it’s short sale or otherwise, but at this time the charge-offs Arkansas is slightly ahead of Florida and we knew those credits.

John Allison

This is John. We don’t want to get too optimistic, but we have had a management change in Florida. We have a new President down there who is doing an excellent job, a lady by the name of Teresa Condas who is doing an outstanding job. We’ve got lot to add on the asset quality. I’m not saying we are through it, and I’m not going to call it being through it until the first quarter of ‘10 as I’ve said in the past.

As I’ve said on the road, we couldn’t get stopper out, we now have the stopper out and the ebb and flow is going in and out of there and we are able to sell it. So keep our fingers crossed. We just had another credit that was a pretty good size credit. Ron just told us about an opening set that’s on in Florida base. Its pretty good opportunity, so we’re beginning to smile a little bit. We’re not getting hit with one every week anymore.

John Arfstrom - RBC Capital Market

Okay, and then just a last question; it seems to be what’s on every investor’s mind. I’m wondering if you can handicap a little bit for us, your approach to M&A and I would guess you are probably thinking you want to be more opportunistic, but you can give us an idea of what you see in the near term and what kind of geographies we might expect in the near term. I think any help you can give us on that would be helpful?

Randy Mayor

Well, there is about 71 banks that have a Texas ratio greater than 100 in our market area. This team has employed a third-party. We are actually going to school as we speak. The teams are being formed internally. We have been working through the bid process. People are going through the training process to take over a failed bank.

We’re getting everything done that needs to be done for this corporation to move. We are vesting with the regulators in the states where we operate, as well as our lead regulators, as well as the FDIC.

I think you’ll see this company has been in the past prepared to move when the opportunities arise. We are in talks with couple of people right now, couple of regulators right now and there may be some opportunities coming. Other than that John, I don’t know how far we want to go with playing our hand.

Operator

Your next question comes from Andy Stapp - B. Riley.

Andy Stapp - B. Riley

You just touched on the Arkansas charge offs; could you provide a little bit more color on those charge offs, what type of loans they were and that type of thing.

Ron Strother

Andy this is Ron. I’ve got to be careful about disclosing the customer. C&I loan, it was both a receivable type loan and a special purpose building. They struggled and weren’t able to make it. We took the charge. We are in the process of taking it into other real estate loan, but we non-accrued the credit, and got an appraisal.

We may have some recovery. We’ve got some wild land, about 60 acres, and it has mineral rights on it. We’ve got a commercial building in North Arkansas, right on major highway, but the one particular asset we thought needed to be haircut and that would be the largest charge, it’s north of Little Rock.

Randy Mayor

Andy, we reserved that back in December as we went through our cleanup. I think we set aside about $1 million for that credit Ron, is that right? pretty close so… We are way up in front on it. It didn’t collapse until in the third quarter.

Andy Stapp - B. Riley

Okay, and can you provide any more detail regarding what you expect in cost saves or additional cost saves I guess I should say, in the fourth quarter?

John Allison

I will let Randall Sims talk about that. We don’t give guidance, but go ahead Randy.

Randall Sims

I can’t exactly predict what all will continue to come in, but we continue to work on some contracts. We’ve got some major contracts that are coming up, co-works, with our core processor, with our debit card processor, with our check vendor, so we’re continuing to work on things like that.

There are a few branches that continue to need to improve and need improvement on what we think personnel wise should be there. We are hopeful that most of the initiative had been completed, but there still is a little bit of room for improvement, if that helps.

John Allison

Andy, I think Randy Sims reported to you that September was 50.15, so you can kind of play with that. I want to fore handle and hopefully we could see something. I’m not sure we’ll see a fore handle in the fourth quarter, but I would love to see something with a fore handle in the fourth quarter.

Andy Stapp - B. Riley

Can you talk about when you might expect to realize historic getting back with some positive or meaningful loan growth going forward?

Ron Strother

Yes, the market is tough and there’s some anemic banks; there’s two very large anemic banks and lenders are moving around Andy. Obviously new projects, our customers are cautious, but there are existing loans at two particular institutions that are 50-year relationships, and we’ve had opportunity to hire some of those loan officers.

So in Arkansas as you know, as you heard on the road, you were there, we are tenth best. We’re in the top ten MSAs in America. We’re seeing the Governor went to France and Germany last month to cultivate more people, and out of that will be service business. So we think that we can get loans from other banks that are valuable relationships and we are trying to get anything new that’s related to these best base sector employers.

John Allison

Andy, you could see a little consumer pick up locally here as HP hires. They’ve gone from the 1,200 to 1,500 employees. That hiring will be completed I guess in the next 90 days. So we are going to see some pickup there. We are probably going to see some pickup on the residential real estate side here also.

Randy Mayor

We also have a project here in Conway that has not funded, that they are just getting started on, so you will continue to see a little bit of growth in Conway. So it’s not completely gizmo, we may actually see a little bit of growth early on and throughout the year.

Andy Stapp - B. Riley

Okay, and do you happen to have what 30 to 89 day delinquencies were at quarter end?

John Allison

I don’t, but Brian Davis can get that for you.

Brian Davis

It was 2.55% to total loans.

Operator

Your next question comes from Joe Finnick - Sandler O’Neil.

Joe Finnick - Sandler O’Neil

On the Florida portfolio Ron or Brian, what was the dollar balance September 30 versus June 30; and then do you have just a rough breakout of the portfolio composition there at quarter end?

Ron Strother

Yes sir, this is Ron. The Florida portfolio at 630 Joe, out of $1.972 billion, $325 million is in Florida. It had gone down at 930, but it’s gone down 16% portfolio. It was $316 million 739, out of the same $1.9 billion, so it’s about 16%.

Joe Finnick - Sandler O’Neil

And then roughly, the portfolio composition in terms of the categories?

Ron Strother

Yes sir, real estate non-form nonresidential, Florida was about a $135 million in non-form it was about $47 million in C&D, one-to-four was about $93 million, that’s the largest categories of those three Joe.

Joe Finnick - Sandler O’Neil

Okay. That’s helpful, thanks. Then guys, the construction and land book to the balances overall there ticked-up a bit this quarter. Do you have the total originations for the quarter, and then can you just talk generally about what you’re seeing in that portfolio?

Ron Strother

Its flat Joe, and it continues to be the funding of a large multi family project here in Conway that’s substantially related to school, but it’s the funding of an existing commitment that we are totally comfortable with, that was about $7 million.

Joe Finnick - Sandler O’Neil

Then just lastly, any general comments on commercial real estate and what you see in there?

John Allison

I keep waiting for that, everybody is looking around each other at this meeting, and we keep waiting for that chute to drop that everybody tell us is going to drop, we just haven’t seen it. Ron?

Ron Strother

We’ve identified all those. Arkansas, we are enjoying this influx, and we don’t loan on big boxes Joe, we don’t do malls, and we are just very fortunate that we have long-term relationships on our occupied stuff. We just don’t do a lot of spec big box stuff.

Operator

Your next question comes from Matt Olney - Stephens Inc.

Matt Olney - Stephens Inc.

Most of the questions have been answered; I’m trying to get a feeling for the margin movement in the next few quarters. Average cost of CD for the last three months looks like it was around 2.5%. Can you give us an idea of your current pricing out there for CDs, coverage range maybe?

Ron Strother

Matt, last quarter the average new CDs put on was about 166.

Matt Olney - Stephens Inc.

And do you have a margin month-by-month from 3Q?

Ron Strother

Yes we do, hold on. For September it was 430, for August 31 it was 427, and for 731 it was 422.

Matt Olney - Stephens, Inc.

Okay and lastly, Johnny, any new thoughts on TARP payback. You have the equity offering down, your capitals impressive, what are your current thoughts on TARPS?

John Allison

I think we’re drawing 25 basis points and this is costing us 8.7% pre tax, so the arbitrage is not very good. We probably look at paying off probably half of the TARP money between now and the end of the year. I mean the group, I talked to them about the other day and I asked why don’t we think about just paying off half of that TARP money, and Ron Strother’s comment was is that like being have pregnant. So, why not go ahead and pay it off? I mean we’ve got the money.

I think that things are improving somewhat. I think the rate of decline is slowing to a trickle. This economy is by no means out of the woods, and I don’t know if we are in for a W or we are in for U on a recession. So I’m hesitant to pay all the money back today.

I know it hurts our earnings, but I mean we took it for a reason, one reason and we took it for security for our shareholders and mainly security for our shareholders. So were we stupid in taking it then or are we stupid for paying it back now. So I’m a little mixed by that, and the team is a little mixed by that, but I would suggest that probably we would look at paying back half of it before the end of the year Matt.

Operator

Your next question comes from Dave Bishop - Stiefel Nichols.

Dave Bishop - Stiefel Nichols

Ron, I think you mentioned that in terms of other real estate loans, there was subsequent after the quarter sale of some asset there, can you talk about that.

Ron Strother

Again I got to be careful. We had a 504 program where the SPA had $1 million behind this, and we were secure from day one. It was in West Little Rock they got dellied up, and we knew we didn’t have a loss in it, but he filed bankruptcy and back to the court process again.

We had offers on the property. We couldn’t get title. We thought we were going to get it close by 930 David, and it just didn’t work. So we finally got title and sold it the next day and recovered interest cost fees, all the stuff that you get. So we hoped it would be out of 930 numbers, it just didn’t work, but it’s back on, it’s gone.

Dave Bishop - Stiefel Nichols

Do you have the approximate size of that?

Ron Strother

1.8

John Allison

It was well underwritten. Our guys did a good job of underwriting it on the front end, and we never had a loss, and it’s just one of those things you have to report, but we just couldn’t get our hands on it, and once we got our hands on it, our team had it sold in a week.

Dave Bishop - Stiefel Nichols

One final housekeeping, actually restructured loan balance. I don’t know if you have that dollar amount.

John Allison

Don’t get me started on restructured loans, don’t get me started. As I told somebody the other day, that 25 years ago when I was going through a divorce, if you’ve been looking for restructured dimes or restructured people, my name would be on that list.

Ron Strother

Brian show it to me. David I think Brian’s got it.

Brian Davis

I actually didn’t bring it up to the meeting, but they were working on it down in accounting, and the number for restructured loans that are on a performing basis is going to be down just a slight tick, like $ 1 million. They didn’t quite have it finalized, but that’s what it’s going to be, down $1 million from the last quarter.

Ron Strother

Those were little nitty credits made up from three or four credits.

Brian Davis

A couple paid off.

Ron Strother

Predominantly my memory is Florida. There was really only one credit in there. In that entire deal there’s about one credit and about $10 million that’s concerning to us, but outside of that, that’s the only credit.

Operator

Your next question comes from Mark Muth - Howe Barnes Hoefer & Arnett.

Mark Muth - Howe Barnes Hoefer & Arnett

Johnny you all have been talking for the last couple of quarters about a lot of real estate projects in Florida that you had in OREO, and just some of what you are seeing down there on the real estate front. I’m just wondering if you could update us on that at this point.

John Allison

A lot of real estate projects. We have some; so far as OREO is concerned, we had two real estate projects, one in [Inaudible], that’s really it. That was about $16 million the total project. We wrote it at the end of the year down to $8 million. We took ocean front lots from $2 million down to $650,000, and now on the books at $650,000, and a house, it was on the books, its $3.5 million down to $1.7 million.

Other than that, we’ve got a little bit in Key West, the one that was a restructure. I’m talking about one of those about $10 million, that’s really it, and there hasn’t been any change in those during the quarter.

Where we’ve seen the change is in the residential, primarily residential and some development property. We are able to clear up about $1.7 million on a piece of property that I think I’ve never heard of up until December last year, and the loan had been on the books a long time.

I went down and looked at it and as we were pretty aggressive on charge offs at the end of the year, I didn’t put anything on reserve on this one, because it didn’t need anything. It ultimately went to bankrupt, and we finally got our hands on one of the options and we collected every opinion of personnel, plus legal, plus past few interest, and that was about $1.7 million.

If we saw something down there that needed to be written down or specifically reserve in December 31, we did it, and as Ron reported to you, the OREO totals, we finally got the damn stopper out of the bath tub. The bath tub was filling up and we couldn’t get the stopper out, because the judges were lenient, we finally got them out, and once we got them out, we saw a lot of activity in our OREO and non performing moving to OREO, and lots of sales for the quarter, and the ultimate result of that entire quarter was $4,000 gain in OREO.

So we sold the house during the quarter, that was a couple of houses over $1 million. Those $1 million sales have come back, which is encouraging to us. We are pretty optimistic right now. We have the famous liquor store under contract for the fourth time, and it might roll out this quarter, hopefully it will. We had another credit, it was about $2.5 million that looked like a major problem. It paid off $2,100,000 of it paid off during the quarter, and the other $400,000 paid off after the quarter.

So you can see the little bit of optimism here coming from, I’m not saying we are out of the woods there yet, but it’s fairly encouraging.

Operator

Your next question comes from Chris Owens – [Kaft].

Chris Owens - Kaft

My question is regarding the FDIC’s deals. Obviously, you have a 13% TC ratio, and expect a lot of non-performing assets. So again, and congratulations on getting this opportunistic capital raised and I just wanted to sort of get your thoughts onto what you thought your cost exactly was at the time of issuance versus what sort of return you can generate on an FDIC deal, and sort of the total asset size that you get there.

Ron Strother

The return on equity will be a lot greater than what we think the cost of raising the equity was, by far we wouldn’t have done it, you know that.

John Allison

There’s numbers all the way across the board on assisted deals from that very high teens to the low thirties. So, you’ll have to model that when you finish your sales, but hopefully we could see a transaction where we’d be somewhere in the middle of that range is what we would like to see.

Ron Strother

I think that’s about the best guidance I can give you. Anybody, Randy?

Chris Owens - Kaft

So when you are pricing, so these are between 15% and 30% ROE. So, when you are pricing your bid, are you sort of pricing it towards the 20% plus ROE?

John Allison

We would hope that we are processing it in that area, we would hope so. We think we are.

Ron Strother

Chris, this is Ron. We promise you we’ll do better than fed funds.

Chris Owens - Kaft

I guess my second question stemming from that would be, obviously having kind of a new sense and may carry some stigma, although I definitely don’t think you guys are suffering from that right now. Key capital that could generate a 20% plus returns to pay off 8.3% paper, do you know what I’m saying. It just seem like why not just use that capital in an FDIC transaction and it would be credit to your return?

John Allison

That’s one of the reasons we are not. I actually agree with you on that. I think it makes sense. It’s just a matter of how much patience the investment community will have with us over the period of time. Is it three months, is it six months or are we going to be able to pull the trigger within 12 months. I think that’s truly up to the pressure that investment community puts on us over the next period of time.

Chris Owens - Kaft

Well, as an investor, I don’t care. The highest return is optimal, so obviously you guys have a great capital position and you put yourself in a great position to do these acquisitions and it seems like paying back TARP could go to back burners, you can put this capital to such good use.

John Allison

We actually have put it on, not totally on the back burner; it’s only been really one discussion among the management team about it, since we did the capital raise.

Chris Owens

Okay. So the bottom line is from what you see, you guys think you can essentially comfortably double your asset size and with the sort of new 2 billion in assets, that could generate a 20% ROA.

John Allison

We think we are approved for a little higher than 2 billion, and essentially we could double our asset size, that’s correct.

Operator

Your next question comes from Joe Steven - Steven Capital

Joe Steven - Steven Capital

Most of my questions have been answered, but I will ask one on the cost of funds. You guys are being influenced a little bit by some of what I’m going to call some of the big uglies out there. I guess to the extend you could talk about it, how is your competition acting and do you have more room to bring your deposit rates down?

Randy Mayor

This is Randy. We continue to have some roll off, and we continue to have some opportunity for improvement. It’s not as great as it once was, but there is opportunity for improvement on the cost of funds, and as I said earlier, we are not chasing the high cost of some of the competition. Actually, we are kind of seeing a lot of it in public funds, some really ridiculous pricing on a spot basis.

So, what we continue to do is to teach and to train our customer service people, our tellers, our managers to look for that core customer, not to chase the high cost of time deposits if they are non-core customer, but look at that customer that’s been there forever and for us to continue to keep them, to work them hard, but we are not going to chase the high cost of deposits. We just can’t do it. It’s been successful for us. We haven’t lost a lot of business and you can see the result in our margin. So there’s still some opportunity to answer your question and we will continue to work it hard.

John Allison

Just as kind of a reference, in the next 12 months CD’s rolling off, average yield is about 230 and we are re-processing at 166 for the last quarter, so that can give you a little idea, but there is still some room on the CD side, there is not much room on the checking and saving side. To be completely honest, any time we want to turn it and stick it back on for deposits, it’s pretty easily done.

Operator

At this time we show no further questions. I would like to turn the conference back over to management for any closing remarks.

John Allison

Thank you. This is John Allison. Kind of talking back on the TARP, we’ve accomplished really what we wanted to accomplish on the TARP. We got rid of half the warrants; I don’t know if we got rid of it yet, but I think the capital rate qualified us for half of it, and I guess Randy Mayor has requested that to be done, it’s in process.

It was a good quarter. I think we’ve done exactly what we told you we were going to do. Look at our fourth quarter run rate, I think you’ll see good improvement. Andy asked a question about how much improvement could we expect going forward. I think if you look at something in the 50% efficiency ratio, I think that answers that question.

So hopefully it will continue to improve as it has in the first two quarters. We certainly appreciate your support and look forward to talking to you in 90 days. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Home BancShares Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts