Home BancShares' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: Home BancShares, (HOMB)

Home BancShares, Inc. (NASDAQ:HOMB)

Q1 2014 Earnings Conference Call

April 17, 2014 14:00 ET

Executives

John Allison - Chairman

Randy Sims - Chief Executive Officer

Randy Mayor - Chief Financial Officer

Brian Davis - Chief Accounting Officer

Kevin Hester - Chief Lending Officer

Donna Townsell - Vice President, Corporate Efficiencies

Analysts

Brian Zabora - KBW

Jon Arfstrom - RBC Capital Markets

Michael Rose - Raymond James

Matt Olney - Stephens

Brian Martin - FIG Partners

Kevin Reynolds - Wunderlich Securities

Nathan Race - Sterne, Agee

Operator

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated First Quarter 2014 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks then entertain questions. (Operator Instructions)

The company participants in this call are John Allison, Chairman; Randy Sims, 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.

The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2014. At this time, all participants are in 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 - Chairman

Thank you, Gary and welcome to Home Bancshares’ first quarter earnings release and conference call. Well, it’s been about three months since we talked to you the game changing acquisition of Liberty Bank has led to a quarter of much improved performance and many new records. In less than nine months from the announcement to the end of the quarter, our team alongside some great and willing Liberty people has transformed that operation into a strong earnings machine. Congrats to both teams, but especially our Home Bancshares team who brought our culture and operating efficiency to the Liberty acquisition. Change is difficult and we had plenty of resistance, but the numbers don’t let, it is what it is. This team doesn’t just talk about it, they do it.

And let’s just look at some of the highlights. Record earnings up 55.8%, almost $10 million increase in earnings for the first quarter, record EPS, record efficiency ratio, record revenue, record pre-tax pre-provision ROA, strong GAAP ROA, much better than most people thought, good reserve deal, improvement in asset quality and good margins. Great job. On the acquisition front, we are very busy and looking at many opportunities. Randy, we will go to you for the more specific numbers and the rest of the game.

Randy Sims - Chief Executive Officer

Thank you, Johnny. It has been a very busy quarter centered around the progress with the Liberty acquisition. As I stated last quarter, a key element was getting the conversion of Liberty completed before the end of last year in order to have a first quarter of combined results between the two institutions. And as Johnny has stated, record, record, record, record, it was a very good first quarter. We are also back and extremely busy looking at banks and other growth opportunities, including de novo branching for the right strategic additions to our organization. And in addition, we are also evaluating our current branches for consolidation and have plans to close or merge 4 in Arkansas and 2 in Florida during the second quarter.

Well, let’s get through the numbers, because they were extremely good. It was another record quarterly profit of $27.3 million or $0.42 diluted earnings per share compared with the income of $17.5 million or $0.31 diluted earnings per share over the same quarter in 2013. That is an increase of $9.8 million or 55.8% as Johnny told you. Now, included in those numbers is $849,000 of Liberty merger expenses. So if you exclude that amount, then our diluted earnings per share for the first quarter of 2014 was $0.43 per share. We are very pleased with the income. And now that makes 12 straight quarters of record earnings when you exclude merger expenses, especially in the fourth quarter of 2013.

Our return on average assets, including all merger-related expenses was 1.64% for the quarter, well above where we thought we might be. But let’s exclude just the merger expenses again and our ROA was a 1.67%. Our core return on average assets that include – excludes intangibles, provision, merger expenses and taxes was 3.26% for the quarter as compared to 2.77% as of last quarter. Our return on average TCE excluding intangible amortization for the year was 21.48%, great numbers.

Now let’s look at the internal ROAs. While the internal overall ROAs for the Arkansas banks dropped some due to the Liberty transaction, we continue to see those same old legacy banks well over 2%. And as you are aware we have said – we said it last quarter, our goal was to get the Liberty regions to an overall 1.5% internal ROA before the end of the second quarter. And now while there were a few Liberty branches that we merged into Arkansas regions that makes it little confusion, we have calculated and I am pleased to announce that Liberty is well over the 1.5% ROA as of the end of this quarter, quite an improvement in a short period of time.

Again, looking at it based upon our internal numbers to be used for comparisons only we are seeing ROAs in our Florida and Alabama regions average in excess of 1.5%, as with the last quarter more improvement in Florida. It will be interesting to see the second quarter results as we continued to make changes and improvements especially with the Liberty regions. As the Centennial Bank level and on internal analysis 70% of all our assets are in Arkansas, 4% of our assets are in Alabama and 26% of the assets are in Florida.

And of course, we need to talk about our efficiency ratio. I again mentioned how important it was for us to get that conversion accomplished before year end, otherwise it would have been March and the expense of two big back room operations. Well, here are the numbers. We ended the fourth quarter with a 45.2% core efficiency ratio and 45.49% for the year of 2013, a great number for any banking organization. And where did we end the first quarter, how about 41.4%. Again, not bad for 90 days after taking on an acquisition, 70% of your size and for more on that number, who better to turn to but Donna Townsell, our Vice President for Corporate Efficiency, Donna great numbers.

Donna Townsell - Vice President, Corporate Efficiencies

Thank you, Randy. For the first quarter 2014, our core efficiency ratio was 41.4% as you already heard which is compared to 45.2% in the fourth quarter of 2013. In regards to Liberty, we picked the low hanging fruit on the expense side to work on first. And as we mentioned at the end of Q4 we were already well past the halfway mark in our projected savings for this acquisition. The balance of the major cost saves for Liberty will take sometime and you will continue to see improved efficiencies throughout the remainder of the calendar year.

I would like to mention that savings like this don’t just happen. I get to report on it but it takes a cohesive team to complete an acquisition, while still keeping the lights on and what a great team we have got. To illustrate that we are able keep the lights on, I would like to report on efficiencies around the company.

For purposes of this call, I rolled them up to the state level and should note that these are not actually core numbers as some components roll up to the corporate level so they cannot be pushed down to the region. So that being said at a bank level for Q1 Arkansas ran about 35%, Alabama 38% and Florida 59%. And I should remind to you that Florida is where almost all of our ORE and special assets are. As we continue to clean that up you will see that Florida is right in line with the rest of the group.

And I might add that Arkansas running at 35% validates why we chose the Liberty acquisition. We knew we could leverage our existing infrastructure and frankly we are bringing it into our expectations quicker than expected. We have a well documented project plan with pre and post conversion activities and each group knows their role. It is much like scenes in a play. To swallow an acquisition as large as Liberty and reap half the cost saves in less than a year is a record for us. And as you have heard, we like to set records. We put a conversion plan together four years ago and it continues to work for us. So to sum it up, we are pleased with our Liberty progress and with our legacy efficiency ratios for the first quarter. We will continue to police ourselves keeping us poised for the next acquisition. Randy?

Randy Sims - Chief Executive Officer

Thank you, Donna. Well said. Let’s switch to deposits. We ended the quarter at $5.34 billion compared to the $5.39 billion as of year end. Time deposits represented 27.23% down a little from the 29.8% of total deposits as we begin to work with Liberty regions. We would like to see that dependency get down, under 25%.

Then that takes us to net interest income, margin and non-interest expense. As usual, I will turn it over to our CFO, Randy Mayor to give you all the numbers. After that, Randy will pass it to Brian Davis to give us more information on our capital. So, let’s switch to Randy.

Randy Mayor - Chief Financial Officer

Thanks, Randy. During the quarter, there was a positive impairment on four FDIC approvals which resulted in $2 million of additional interest income, a reduction of our non-interest income of $2.1 million and a $71,000 in non-interest expense in the FDIC true-up. So the net impact was $200,000 of expense for the quarter.

As a side note, the total positive impairment was $11.4 million, which will continue to be recognized as the yield adjustment over the weighted average life of the loans, whereas the reduction of the indemnification assets of $8.3 million will be recognized over the life of the loss share agreement.

The net interest margin improved from 5.09% in Q4 to 5.42% in Q1, primarily due to the loan yield improving from 6.50% to 6.88%. The yield on earning assets improved 39 basis points from 5.43% to 5.82%, while the yield on interest-bearing liabilities declined slightly from 0.41% to 0.40%.

In the non-interest income area, service charges increased $181,000, trust income increased $152,000, and insurance, which typically has a strong first quarter increased by $638,000. Gains on the sale of OREO were at $539,000, while the FDIC indemnification contra income was $4.7 million for the quarter. In the non-interest expense category, salaries and benefits continued to decline by $571,000, occupancy and equipment increased $556,000 and data processing increased $255,000.

Advertising expense declined $131,000 while merger expenses declined $16.5 million. FDIC and state assessments increased $256,000 and other expenses in various categories increased $763,000. As mentioned, our merger-adjusted ROA of 1.67% and a core efficiency ratio of 41.39% were very strong ratios for this quarter.

With that, I will turn it over to Brian.

Brian Davis - Chief Accounting Officer

Thanks, Randy. During the first quarter of 2014, we paid out dividends of $4.9 million and grew retained earnings by $22.5 million. For Q1 2014, our Tier 1 capital was $582.8 million, total risk-based capital was $631.8 million, and risk-weighted assets were $5.0 billion. As a result, the leverage ratio was 9.08% compared to 9.38% at 12/31, Tier 1 capital was 11.67% compared to 10.88% at year end, total risk-based capital was 12.65% compared to 11.75% at 12/31.

Additional capital improvements include book value per common share was $13.34 compared to $12.92 at 12/31, tangible book value per common share was $8.38 compared to $7.94 at year end, and the TCE ratio was 8.5% compared to 8.0% at 12/31. Randy?

Randy Sims - Chief Executive Officer

Thanks, Brian. We will now switch to our Chief Lender, Kevin Hester, who will fill us in on all loan matters.

Kevin Hester - Chief Lending Officer

Thanks, Randy. It was very easy for me to remember the asset quality numbers for this quarter as the most significant ratios were all the same number, 1.03. The non-covered non-performing loan ratio 1.03%, the non-covered non-performing asset ratio 1.03%, the allowance for loan loss coverage of nonperforming non-covered loans 103%, all very solid ratios especially given the loan loss coverage ratio that with the Liberty non-performers being covered without acquiring of our corresponding loan loss reserve. Our allowance for loan losses as a percentage of non-covered loans increased from 0.93% to 1.07%. However if you added the Vision, Premier, and Heritage acquisition discounts to the allowance for loan losses the combined figure would be 4.86% of non-covered loans at quarter end.

Non-covered real state owned decreased 21% on a linked quarter basis from $29.9 million to $23.5 million. The share related to Arkansas properties still remains above 80%. For the second consecutive quarter net charge-offs were less than half of the average of the previous four quarters. 19% net charge-offs was the lowest level in 11 quarters. Early stage past dues declined a solid 21 basis points to the lowest point in six quarters from 1.63% to 1.42%.

The decline in loan balances this quarter broke a recent trend of loan growth, a few hours pay-off plus the delay in some anticipated closings led to this decline. Unfunded commitments increased in the first quarter and the second quarter loan pipeline is back to the level seen in late 2013. A stronger focus on two specialized lending areas is also expected to pay dividends later this year.

Secondary mortgage is still strong with closing volume up 20% quarter-over-quarter. As we enter the final year of our commercial loss share arrangement on the first two failed bank acquisitions and we approach that point and the others. We’re focused on the resolution of troubled loans and we’re very pleased with the progress we’ve made over the past year.

Our Special Assets Group is very experienced and diligent and the process for the wind-down of the commercial loss share is in place. With the starters in the field, with the acquisitions in the Liberty regions and the headway we’ve made in our legacy markets I’m very excited about the prospects in the lending area for the remainder of 2014.

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

Randy Sims - Chief Executive Officer

Good report, thank you Kevin. To sum it up again we’re very pleased with our results of the first quarter and we look forward to continued improvement in the second quarter as well as some possible new acquisitions. We saw our 12th consecutive quarter of record earnings, improvement in our margin, and a significant improvement in our core efficiency ratio, one quarter after the largest acquisition in the history of our company. Congratulations to all our employees, what a great job, well done.

And with that I’ll now turn it back over to our Chairman Mr. Allison.

John Allison - Chairman

Thank you. Great quarter guys. You might shed a little light Kevin on the pools, the Liberty pools. We had – we put a couple of pools and I think you call them 20s and 30s and it spears to me at this point that the performance of those tools is much better than anticipated and if you want to talk about that just a minute.

We have expected pay-downs and you expect pay-downs and the equation of the income that comes on that, but we’ve had some other pay-downs as well and they’ve been good based on the experience we expected well I think we’ve had positive experience compared to what we anticipated in due diligence. And I think that’s correct. I am pretty pleased with what we’ve seen thus far. We’re going through all of those loans and we do renewals and things now, but so far so good and much better than we anticipated. So I guess that, that point in time Gary we are ready for Q&A.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Brian Zabora with KBW. Please go ahead.

Brian Zabora - KBW

Thanks. Good after guys.

John Allison

Good afternoon, Brian.

Brian Zabora - KBW

So sorry maybe just a question on M&A, just where you stand now or how is pricing and how are the conversations going?

John Allison

I think at the conference recently I said we’d sign the letter of intent and they will be talking more about that probably tomorrow, the day or tomorrow morning, tomorrow..

Brian Zabora - KBW

Okay.

John Allison

Tomorrow, we’ll talk more about that tomorrow. We’re looking at – there are lots of opportunities and we’re looking at lots of opportunities some big and some small. Pricing is beginning to get a little stupid. It’s just beginning to get a little stupid. It’s – we looked at some transactions we would like to do. We can’t do them even with our stock as strong as our stock has been. So I don’t know who can do them. If we can’t do them, I don’t know who can do them. So we are busy and you just got to pass the lines that are – that won’t work for you and go to ones that will.

Brian Zabora - KBW

Great, alright. And then maybe on the Liberty footprint, are you seeing loan balances stabilize? Are you seeing growth and maybe just what you are seeing on that side?

Randy Sims

Let Kevin take that.

Kevin Hester

Hey, Brian, this is Kevin. Yes, we think that the loan balances are stabilizing. We, Davy Carter and Stephen Tipton, are doing a great job going through that portfolio and working through the deals. And it’s the first time through. We don’t like some, but some don’t like us. And we will continue to work through those, some of the pricing that we are seeing in that market is just really silly, but that’s about two-thirds in the first quarter decline, the rest of it is a great success story. We have got an Arkansas customer that sold their company and it went from a $20 million plus loan to about $30 million deposit almost overnight. So you like to see though you hate to lose the loan, but you like to see those stories. So long answer to say, yes, I think we are seeing those balances stabilize. And we are actually making a good level of loans in those two regions.

John Allison

Expect, this is Johnny, we probably expect Northeast to be flat to up next quarter. So, it’s actually looking pretty good. The pipeline looks pretty good. Some of those loans, I mean, we are not going to do dumb deals and some people, they are dumb, bankers run around everywhere doing dumb deals. So we are just not going to do those. I mean, we maybe forced into doing a bucket of $150 million or $200 million in the – we haven’t done threes. We maybe forced into doing a $150 million or $200 million in threes and I don’t like to be able to make a lot of the impact on this, but we are seeing threes stuff fixed for 7 and 10 years. And that’s just makes absolutely no sense. And that’s not salesmanship or selling customer relationships. Anybody can give something away. So we see some of that from time-to-time. We are matching some of that stuff and we are going to continue to match it, so.

Brian Zabora - KBW

That’s a big help. Thanks for taking my questions.

John Allison

You bet.

Operator

The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom - RBC Capital Markets

Hey, good afternoon everyone.

John Allison

Hi, John.

Jon Arfstrom - RBC Capital Markets

Kevin, just to confirm one thing, I want to make sure I heard it right you said two-thirds of the sequential decline in loans was Liberty runoff approximately?

Kevin Hester

Approximately, yes.

Jon Arfstrom - RBC Capital Markets

Yes, okay, good. That helps. And I guess for Kevin or Randy, just thinking about the margin here, you talked a little bit about loan payoffs, in that margin, is there – would you say there is any temporary or one-time benefits from some of these early payoffs or Randy, would you say this is kind of a near-term run-rate on the margin?

Randy Sims

Jon, this is Randy. And specifically looking at the Liberty area, yes, the additional payoffs kind of a cycle, I guess, if there is a silver lining with the payoffs that some of that income comes to the bottom line, but you also in that as that’s happening we have to prepare, we have put these loans on without a loan loss reserve being over there. So we are also in the process of building that loan loss reserve for a potential charge-off that come down the pie, but I think the first quarter did see some acceleration in the income coming in from that because of these payoffs. And hopefully that will stabilize somewhat with the slowdown. On the coverage side, we also – those adjustments in those tools helped to kick the yield up on that.

Brian Davis

Jon, this is Brian. On the Liberty loans, we have approximately (indiscernible) we put about $1.6 billion of those loans as FASB91, which means they were impaired loans and they have a mark on those loans that is accreting back into income. And for the fourth quarter of 2013, it was $8.6 million of accretable income on the Liberty loans, which is going through margins and…

Jon Arfstrom - RBC Capital Markets

That was for the first quarter.

Brian Davis

Yes, for the first quarter of 2014 and for fourth quarter of 2013, it was $3.4 million. So we had an additional $5.1 million of additional accretable income from those Liberty loans and lot of that comes from payoffs when you have the mark on the loans and then it pays off.

John Allison

What it’s enabled us to do, Jon, is to build that reserve. It’s enabled us. We put $6.9 million in reserves. So we are not booking that into income, something that’s non-sustainable. We are booking it into reserve, because as Kevin said, we have added all these loans, we have added no reserve. On the Liberty transaction, of the $1.8 billion in loans, there was about $100 million in marks of some fashion put on those loans. So as those loans pay on a monthly basis, that accretes something in the income similar to the mark on the loss share loans. Has that cleared up?

Jon Arfstrom - RBC Capital Markets

Yes, yes. So if I summarize it, I guess, net interest income maybe a little bit elevated, along with the margin, but it didn’t drop to the bottom line. So it’s safe to say if margin probably comes down a bit, net interest income comes down a bit from Q1, but may not be that big of a bottom line impact. Is that the right way to think about it?

John Allison

I think that’s a good assumption. Basically, $7 million of the $8.5 million came in of the Liberty deal went in reserve.

Jon Arfstrom - RBC Capital Markets

Okay, alright. I guess the next big question is on expenses and it’s pretty incredible you have been able to get this kind of savings so far. But when I look at the core and I carve out the merger expenses, I get $38 million to $39 million roughly in core expenses, what’s possible from here? I mean, that has the full quarter of Liberty in it and I guess what’s possible from here in terms of expenses?

John Allison

Well, we don’t have a specific number. I will let Donna talk about where she is in the cycle, but there is more to come out of Liberty. As she reached up and grabbed the apple off the tree, it was pretty easy to do and it will be little tougher, because it’s higher up. You got to get a ladder now. So, I will let Donna talk about what she is going to do.

Donna Townsell

Okay. And certainly, I am getting my ladder out of the shed now. Originally, we quoted about two years before we would say our full projected savings that we have made significant progress in nine months that we are proud of. And for Liberty specifically, there is more expense controls there. They won’t be as big as low hanging fruit. For example, the branch study, we haven’t looked at all their branches yet. And that’s not just for Liberty that will be enterprise wide that there is a movement with electronic medium and people don’t go into branches as often. So we won’t have branches just to have a breach as we want to be efficient. So we are not saying we are going to shut them down, we are just saying we are going to look at them to see what’s the most efficient. There is contracts out there yet to be worked. We took a hold of the big ones originally, but there could still be some improvements in that area. So I think the rest of the year you will definitely see some improvements made and then we will have to see where we are at that point.

John Allison

We haven’t really addressed the retail side, but we are going to address the retail side. And that’s what Donna is talking about or actually we may close the branch, we will start looking to evaluate all companywide branches below x millions of dollars. And some of them might be there for a reason, so we got a lot of transactions, but we are going to look at all of those. So, may help the efficiency of the entire company.

Jon Arfstrom - RBC Capital Markets

Okay. Well, that’s helpful, Donna. I am sure John will ask you to use your own ladder, you might not want to run that through expenses.

Donna Townsell

No, I will buy my own for sure.

John Allison

Job, great job.

Jon Arfstrom - RBC Capital Markets

Thank you.

John Allison

Alright.

Operator

The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose - Raymond James

Hey, good afternoon everyone.

John Allison

Hi, Michael.

Michael Rose - Raymond James

Hey, I heard Donna give the efficiency numbers by state, Florida is at 59 kind of how do you think about getting it closer to where Arkansas and Alabama is? I mean, do you need another deal? Do you need loan growth to pick up? What’s the process or the algebra to get there?

Randy Sims

Well, you do have to grow your loans into – you got to grow in that footprint with the balances. I think that will certainly help if we can do that.

John Allison

I think also you have got the sad area down there, that’s where our additional staffing is to as we work through these loans and work them down. Hopefully that area will shrink and as we made progress on the people.

Randy Sims

And they are making good progress and we have had some that we are not replacing when we have some turnover if we don’t require something with a large amount of problems, you will continue to see that if we make acquisitions that have a larger balance in special assets and those will hang on for a little while longer, but they are making good progress.

John Allison

I think for your presentation, Donna was moving in that direction that way.

Donna Townsell

That’s exactly right. If you take that out and look at Florida, for example, South Florida, the improvements they have made over the years, the rest of Florida is doing a great job. It’s just that that’s where the bulk of our ORE is and Arkansas and Alabama don’t get penalized with that, so.

John Allison

We didn’t get there, we didn’t get to this efficiency ratio overnight and it takes a while we get there as evidenced by South Florida continuing to improve their efficiency ratio. And once – hopefully the bad news is that we will get rid of all the sad loans and the good news is we will get rid all of the sad loans. It’s kind of the two edged knife.

Randy Sims

Yes, and this is Randy. In addition to that we have got a couple of de novo branches that we have started up, but they are doing extremely well and they just need a little more time. You take Pensacola, we seeing loan growth out of there and we are very, very pleased with that. But in addition to the sad expense that will eventually go away we have got some over capacity in some of our branches and that goes into us looking at all our branches for that over capacity to see if it would be more efficient to combine a couple or whatever. But also we have got some startup branches not only there we have one in Seagrove that are coming on that will continue to get better and better. And you will see that efficiency ratio start to get a little bit better and better as we go on down the road.

Michael Rose - Raymond James

Okay that’s great color. And just as a follow-up switching gears to loan pipelines and kind of what you are seeing out of each of your markets, I think you said two-thirds of the decline in loans was from Liberty this quarter meaning a third was from maybe a core portfolio, can you kind of talk about what you are seeing and if the weather impacted this quarter and kind of how pipelines are shaping up into the second quarter? Thanks.

John Allison

Yes, I haven’t noticed the weather I don’t think that’s a big concern to us. But I think the Central Florida, South Florida both of those are – have good pipelines. Northeast Arkansas got a good pipeline. I think we feel like that may be flat for another quarter there, but they are booking a good amount of loans. Northwest Arkansas is doing well. Really all of our regions are contributing and that’s where we needed to be.

Michael Rose - Raymond James

Alright guys. Thanks for taking my questions.

John Allison

Thanks.

Operator

The next question comes from Matt Olney with Stephens. Please go ahead.

Matt Olney - Stephens

Hi guys, how are you doing?

John Allison

Hi Matt, how are you?

Matt Olney - Stephens

Hi, I am well. Thank you. Going back to the M&A discussion John you have mentioned deals that you are looking at some are large, some are small, remind us your sweet spot for M&A deals and how small you would go on a deal?

John Allison

Well, I mean our letter-of-intent deal is only about $300 million deal but if we close that deal it’s really pretty strategic. You will see how that deal works for us. We will go to the $300 million to $400 million if the big ones get out of price range that don’t make any sense and you have to go to the smaller ones and that’s what we will do. We will go wherever the deal is. We are pretty disciplined on price and we just draw a line, I mean we are on a deal and that’s a big deal. We bid on it. We are going to bid on it I guess tomorrow, next week or sometime I don’t know it’s a deal it’s out there. If we decide to, I don’t know that we will, but we are trying to make that deal work. We are just trying to make – we are trying to figure out a way to make it work. And short of a bunch of assumptions that are too aggressive, it doesn’t work.

So we just got to – I hate to say this but when we get investment banker involved in the deals they – whatever it take to get them to signup on the bottom line and them to signup and promise them the moon and try to produce and you can’t turn chicken into chicken salad. So it’s pretty obvious from this quarter of what we can do with a larger transaction. I think that goes without saying. But on the other side if you do a $300 million, a $500 million, a $600 million that adds up over time and you are going to get the same result. It is just going to be a longer period of time. So we are still back to the same old story. We are looking for those deals that really makes strategic sense for us and where we are to be. And if it’s a small deal that makes sense we should do it. But we can do more with a larger transaction in a shorter period of time.

Matt Olney - Stephens

So are there any markets within your footprint where M&A pricing is still reasonable or is your commentary kind of throughout your footprint?

John Allison

No, that’s not correct. There are still reasonable deals out there. It’s kind of a – you kind of prioritize and try to figure out where you want to be and you know about where their price range is, what they are looking at and they need to see why you are working on those deals, suddenly here is a bigger one that maybe has more in our sweet spot as Randy said and you kind of drop those small ones to move to the big one not – it just draw a sheet to it and you get there and you work it and its you can’t make it work so you go back to the small room. So, you just remain disciplined and continue to look, Tracy French probably has – I don’t know six or seven for us to look at right now. Kevin is doing due diligence here in the next couple o weeks, another one.

So I mean we’re busy, we’re very busy trying not to waste our time. I was with the guy the other day and he said come and do due diligence and I said no, you give me a price and let me decide whether we want to play or not and I said we don’t waste your time or my time either because if you are out there too far out then you’d be wasting my time and your time. So you gave me a price and if we think it’s worthy of us coming to look well come look. That sounds rude and obnoxious but there are so many of them out there you have to draw that line.

Matt Olney - Stephens

Thanks guys.

John Allison

You bet.

Operator

The next question comes from Brian Martin with FIG Partners. Please go ahead.

Brian Martin - FIG Partners

Hey guys. Maybe just back to the question on the payoffs that you guys touched on earlier and discount I think it was Brian that mentioned the $3.5 million versus the $8.5 billion this quarter, can you kind of talk about how likely it is you think those – that type of level continue? And maybe just kind of how you are thinking about that relative to the reserve build, where you would like to see the reserves trend to as you go forward?

John Allison

Well we wanted to settle. Is that what you’re asking, why we want that reserve level to settle.

Brian Martin - FIG Partners

Yes.

John Allison

The one I am sorry.

Brian Martin - FIG Partners

Yes.

John Allison

In our past lap we ran at 150, years ago we ran at 150 reserve and that was sufficient. As you can see asset quality is improving and charge-offs were down. So we’re probably heading towards that. We don’t believe in funny money income so I’d rather build our reserve and we got all this accretion coming in if we can do that and Kevin if you got.

Kevin Hester

I mean that would be another $20 million to get to 150 that would be roughly another $22 million and there is certainly that they probably take us all year to get there under normal circumstances. But I mean I don’t w- we haven’t picked the number but as Johnny said 150 has been a number we’ve been comfortable with in good times where we’re headed we hope.

John Allison

Brian we came out last quarter with 0.92 and seen us with 0.92 reserve which we stacked on, purchased $3 billion worth of loans and its just a number that have been looked good to me. I don’t – just to the point 0.92 didn’t make money, I don’t like that number, I don’t like B and 0.92. It really takes anything 0.75 probably covered but if we’re 150 we’re just – its just – I am not sure we’re totally out of the woods in this economic side, we’re probably better off having too much and too low.

I think you also need to keep in mind that those marks on there. So I think you’re like a 4.80, 6 or whatever that number was, when you add the marks to what the reserve is there. Brian I think maybe you’re looking at little bit with that $8.5 million of – that Brian was talking about I think that was about $100 million worth of pay-offs coming out of that $1.6 billion portfolio. So as that slows down you’d probably see that build slowdown a little bit too.

Brian Martin - FIG Partners

Okay, alright. And maybe just a couple of other questions, you talked about potential branch closings, I guess is your sense that would be just kind of a branch here, a branch there, I mean there’s no overhaul relative to the branch system but just as you look through it. Is that fair to say?

John Allison

No, there is no general overhaul at all. We’re just cutting a line on kind of formula for how many transactions, how many non – we have thrown out time deposits, we’re looking at core counts and see in it. If we’ve got some small, small branches that really don’t make any sense and maybe closing those. So it’s going to be a process where we started at the very bottom you can see I think there’s a few of them out there that just don’t make sense, so not some general overhaul or getting rid of a ton of them.

Brian Martin - FIG Partners

Okay, alright. And maybe just two last things you talked about the loan portfolio and kind of later in the year maybe picking up with a new segment I mean Kevin can just touch on that and give any color?

John Allison

Say that again say that again.

Brian Martin - FIG Partners

I thought that you mentioned that – maybe Kevin mentioned in his prepared remarks about a new potential loan segment or something you’re thinking about later in the year that would pick up that, is that long or that?

John Allison

For us it would be SBA and we got an accounts receivable product we call business manager and we’re going to focus on that. As a company we roll that out to Florida and other into the Liberty branches that have not had that.

Brian Martin - FIG Partners

Okay, and then….

John Allison

Very profitable products that we’ve had for sometime in the Centennial organization.

Brian Martin - FIG Partners

Okay. And the internal ROA for all of Arkansas, where was that, with Liberty and the legacy combined this quarter? Did you get that?

John Allison

It was 2%, 2%.

Brian Martin - FIG Partners

That’s with Liberty.

John Allison

Yes.

Brian Martin - FIG Partners

Right, okay. And the cost?

John Allison

I remember that’s internal, it doesn’t include some holding company expenses that just are for the internal comparison.

Brian Martin - FIG Partners

Okay. And (indiscernible).

John Allison

I am sorry for the interruption.

Brian Martin - FIG Partners

That’s alright. And maybe just remind me Donna the – at announcement your projected cost saves versus what you’ve achieved thus far, where do you stand on those two numbers?

Donna Townsell

Well I think we had reported last quarter we were a little over the halfway mark. So I really don’t want to get locked into a number of what we think is less but originally we were hoping somewhere around the $10 million range give or take. So.

Brian Martin - FIG Partners

Okay.

John Allison

On the ROA side we were able to – the game-plan was to get Liberty to 150, we feel like as Randy said we’ve exceeded that in the first quarter and it’s already over that. So as you remember in the last call I said if we see Liberty doing that on our way to getting into 150 but it’s running north of 150 now and I am back on the road shopping and that’s what we’re doing, we’re back on the road shopping.

Brian Martin - FIG Partners

Okay, alright, alright. Thanks for the time guys. Good quarter.

John Allison

Thank you.

Operator

The next question comes from Kevin Reynolds with Wunderlich Securities. Please go ahead.

Kevin Reynolds - Wunderlich Securities

Thank you. Good afternoon everybody.

John Allison

Hi Kevin.

Kevin Reynolds - Wunderlich Securities

Hi, so most of my questions have been answered. Good quarter, guys. I will toss this out. This is something that Randy said on the call, but I will also open it up to Johnny to discuss it as well. But Randy I think you said that you were looking forward to some possible new acquisitions as opposed to just a possible acquisition. Does that imply that you all fee – would feel comfortable doing two at one time or sort of having two in the pipeline at one time that have both been announced, or do you feel like you would need to do one, kind of squeeze out profitability on it before you got to the next?

Randy Sims

No, I think that you are out there harvesting, you got a big, you got to fill the bag up. So we’ve got without doubt one of the best conversion teams I think you could say after the Liberty results in America and bring them own, we’d love to have a couple in the pipeline. It really gets down to the point of pricing and negotiating and of course we’ve got one of the best to do that in our Chairman.

John Allison

I don’t – we wouldn’t do two Liberty’s. So but we would do Liberty in a $3 million or $400 million one.

Kevin Reynolds - Wunderlich Securities

Okay, okay.

Randy Sims

Yes. Let me just add to that is we’ve done two before. We did Premier and Heritage at the same time if you remember in our history. And we just had them scheduled as far as the conversion one after the other. So I think Johnny is right. I wouldn’t say the two giant ones at one time and certainly we got a small one, a medium sized one or whatever. But we’re still - wanting the growth.

Kevin Reynolds - Wunderlich Securities

Okay. And I know you said you’re targeting Florida and there was a lot of different places you could be in Florida and lot of .different places that you currently are in Florida. Do you have any preference right now – if you had to prioritize the metro markets in Florida? Could you do that for us on this call, just kind of give us an idea of which markets you prefer more than others right now given your size and what you need to achieve more critical mass?

Randy Sims

I think that we like from Orlando South and then from Orlando North. Some of these guys were looking at might be public, Kevin. And if I gave you an area I know what you’re going to – you’re going straight in there and see who the people are. So I don’t – we’re pretty happy with – we are probably – you are probably going to see we are looking at a de novo branch in the Naples area. We are probably going to do that if it works out and we get the right leases on that deal. We are really looking where it makes the most sense. Just like Liberty, we were on seven or eight Florida deals and here came Liberty. And we dropped them and move to Liberty. So we are going to do the deals that make the most sense for us. If we were able to get the one that I have talked about on the Letter of Intent, if that works, it’s a real strategic move for us it makes a lots of sense. So would we beef up South Florida? We would. And would we beef up in Orlando? We would. In Tampa, we would. We lack those areas. We are not on the East Coast. We have tried to be there a couple of times, but we haven’t gotten there. So maybe we are better off playing on the West Coast. So we will – we would get more mass on the West Coast, it looks like revenue.

Kevin Reynolds - Wunderlich Securities

And when you talk about possible South Florida, I mean, are you still a little bit, how should I say, a little bit nervous if you pick up the phone call somebody and they answer the phone by saying hola?

John Allison

I don’t know what that means.

Kevin Reynolds - Wunderlich Securities

Well, what I mean is…

Randy Sims

Yes, I have got yes, no. We are okay. I mean, we looked to one – we looked to a deal down there the other day. They had three or four branches. And one of them happen to be in that area where they would answer the phone, it wasn’t a big deal to us.

Kevin Reynolds - Wunderlich Securities

Okay, alright. Well, thanks a lot and good quarter.

John Allison

Thank you.

Operator

(Operator Instructions) The next question comes from Nathan Race of Sterne, Agee. Please go ahead.

Nathan Race - Sterne, Agee

Good afternoon guys.

John Allison

Good afternoon.

Nathan Race - Sterne, Agee

Just wondering to follow up on the credit quality discussion and just thinking about provisioning going forward, give us a sense….

John Allison

Can you speak up please?

Nathan Race - Sterne, Agee

Yes, sorry guys. Can you hear me now?

John Allison

Yes, wow.

Nathan Race - Sterne, Agee

I think just to follow-up on the credit quality question and provisioning going forward, can you give us a sense of what we can expect both on the non-covered and covered provision going forward? I understand there was some churn within the acquired portfolio this quarter and you had to provision for that appropriately, but if you could just give us an idea of what to expect going forward, I’d appreciate it?

John Allison

Well, we are going to evaluate our asset quality as we continue forward, but as I said earlier, we have always run at about in our past, we always run about 150 reserves and that’s our comfort level and that’s kind of where we have always been. So we are kind of building towards the 150 reserve and now like Kevin said, that’s another $22 million product, I guess the rest of the year to build to that. And then we will probably quit or if we determine we need to quit and we need 140, then we were to stop at 140 or Kevin determines that we are having some deterioration, we need to go to 160. So I’d say the range is 140 to 160. Kevin, you agree it’s pretty close.

Kevin Hester

Alright. The asset quality, you have seen the numbers there. They have been very stable the last few quarters. And so the biggest question is what happens going forward with Liberty. It’s a new portfolio to us and it’s big compared as relative to the total. So we just have to see how that matures and how that plays out.

John Allison

I mean, we stacked on $3 billion worth of loans with no reserves basically. We got marks on them. That’s where the accretion is coming from. We got marks on them, but – it just looks funny and we came out to fourth quarter with a 0.92 reserve, that’s just not a level that this group has been comfortable with. So we are headed towards the 150, we might pull up at 140 or we might go to 160, but probably in the 150 range is where we will end this.

Nathan Race - Sterne, Agee

Okay, great. Thanks guys.

John Allison

Thank you.

Operator

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to John Allison for any closing remarks.

John Allison - Chairman

Thank you, Gary and thank all of you for your participation in the company. Thanks for your help and your support. We will talk to you in 90 days. And hopefully, we will have a deal or two done between now and then. Thank you.

Operator

The conference is 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!