Home Bancshares, Inc. (HOMB) Q4 2014 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen. Welcome to the Home BancShares Inc. Fourth Quarter 2014 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks, and then entertain questions. [Operator Instructions] The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2014. At this time, all participants are in listen-only mode and this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to our first presenter, Mr. Allison.

Thanks, Ed, and welcome to Home BancShares fourth quarter and year-end earnings release and conference call. With me today is Randy Sims, our CEO of Home BancShares; Tracy French, the newly appointed CEO of Centennial Bank; Randy Mayor, CFO; Brian Davis, Chief Accounting Officer; and Kevin Hester, our Senior Lending Officer. 2014 was the best year in the Company's history and the fourth quarter was the best quarter ever. I told you over a year ago that the Liberty deal was a game-changer and it truly has been. Over the past six years, we've acquired failed banks, bankrupt banks, posted selected assets and loans [indiscernible], we bought some good banks and we bought some core performers like Liberty. That's what we do, we fix them. Liberty was the largest one that we've ever done, $2.9 billion bank, actually had a little [indiscernible] and it wasn't quite that big but the jury was still out to sweep our team with execute on one that side. [Indiscernible] Liberty Bank, the best year they've ever had prior to us owning it was about $20 million and the company earned over $40 million in the first year. So we've got some pretty good highlights this year. Record first quarter earnings and 2014 income, first quarter was a little over $30 million and $0.46. Year-end income was $113.2 million or $1.70, and that's after $6.2 million in merger expenses. Core efficiency ratio 40.15%, best we've ever done. I saw some briefs in some months, I thought we might see a three in front of it, but we got all three closed. Core ROI of 1.67% and a great job on the expense control, our noninterest expense was only up $1.8 million over last year; organic loan growth over $300 million; reduced charge-offs; improved asset quality. Stockholders' equity is now over $1 billion. In 2014 we increased stockholders' equity $174 million, over 20%. Tangible book went from $7.94 to $9.90 as an increase of 24.7% and we had record revenue for the year of $98.2 million. We've kind of been flat over the last three quarters but I guess the loan growth finally kicked in, we've run about [94] [ph] given those past [indiscernible] earnings per share. We grew your tangible book by 24.7% and we grew your EPS by $0.43 or 32.3%. Bottom line, thus far we have done pretty smart deals and our goal in every deal that we do is what we call AAA at Home BancShares. That's accretive, accretive, accretive, that's accretive to book, that's accretive to tangible book and it's accretive to EPS. On the M&A side, I hope the quality of the deals in 2015 are better than they have been in the last couple of years. There's really been a bunch of silly deals doing out there. The buyers are giving all the savings to the sellers. Major dilution to tangible book and long loan banks maybe if not infinity. We just need to be aware that the Bank is trading at 1.5 book that pays 2.5 book excluding the tangible book. If a Bank's EPS is $0.17 and they pay $0.30, that's dilutive to EPS. So in closing, I hope we see smarter deals in 2015. We are certainly on the hunt and we look forward to another great year in 2015. Randy?

Thank you, Johnny. As we said, what a great quarter to inaugurate the year. Congratulations to all of our employees for a very successful 2014. You have made a difference in our continued success. The fourth quarter of 2014 was the most profitable quarter in the history of our Company, as Johnny said, and that leads me to quote my favorite say on this call, that is now 15 consecutive quarters of record income. And on top of the record income, we also had another quarter of significant organic loan growth. It really was a wonderful year for us. We started 2014 with the largest and arguably the best acquisition in the history of our Company with Liberty Bancshares in Arkansas. And then as you may recall, we added Florida Traditions in the third quarter. It really tied together our presence in central Florida. And in the fourth quarter, we added Broward Bank of Commerce in Fort Lauderdale. All these acquisitions were signed, closed and converted in record times to enhance the earnings of the corporation. So as of December 31, the Corporation is sitting at $7.4 billion in assets. And as it was in 2014, we will continue to look at potential acquisitions, look for organic growth opportunities and work to improve our existing markets in 2015, and to get that done I am very excited about the recent promotion of Tracy French as President and CEO of Centennial Bank. Tracy and I have been working very close together for months. This change will give us both more time to focus in different areas of the Corporation along with our existing management team to take Home BancShares and Centennial Bank to greater levels of growth and profitability. So to tell you a little bit more about the change, and he may add a few comments on acquisitions, I will turn it over to Tracy.

Thank you, Randy. I look forward to continue working with you and our Board and the best staff in America throughout Centennial Bank. I'm very honored to be given this opportunity. I've been fortunate to work with this group for about 12 years now and with Home BancShares and Centennial Bank and witnessed the success of what it's done over the years. I'd say about 85% of the group I've worked with or around and look forward to working with the others and get to meet them and know them very, very soon. You've set the bar pretty high, I guess you're going to set the bar a little higher later in the conversation today, and the acquisition, while it's still very busy, our due diligence team continues to communicate, we actually had a meeting this afternoon with another opportunity, so Johnny is keeping me busy there and look forward to continued success and expand the Company if the right price and right deal comes along. Again, thank you again for the opportunity and look forward to the next 12 years working with you.

Thank you, Tracy. It is going to be really good I think for the Corporation and can't wait to get started in 2015. So now, let's get to the numbers. I will go through these very quickly since Johnny has already highlighted many of them and we'll just add a few more comments. Our quarterly profit was a record $29.9 million or $0.44 diluted earnings per share compared with income of $13 million or $0.19 diluted earnings per share the same quarter in 2013. That is an increase of $17 million or 131%, quite a change from 2013. More importantly, excluding merger expenses, with the acquisitions in the fourth quarter of about $1.7 million, diluted earnings per share was $0.46 per share. That was the goal we wanted to reach for the fourth quarter and we did. Our return on average assets for the fourth quarter was 1.62% as compared to 1.56% for the third quarter 2014. But again that included merger expenses. So if you take out the merger expenses, then our return on assets was 1.67%. Our return on average assets excluding intangible amortization was 1.74%. Our core return on average assets that excludes intangibles, provision, merger expenses and taxes was 3.13% for the quarter, all improvements over last quarter. Our return on average TCE excluding intangible amortization for the quarter was 18.72%. The overall average internal ROI for the Arkansas, Alabama and Florida banks continue to be strong and consistent, with Arkansas still substantially leading the pack. We have been working on a new reporting methodology that has now been implemented to give each region an internal comparison on more of a core basis that actually points out the strengths and weaknesses. I believe this will be a very valuable tool to our managers as we begin 2015. At the Centennial Bank level and on an internal analysis, 64% of all assets are in Arkansas, 4% of assets are in Alabama. Florida has actually gained on Arkansas in the last two quarters with good growth increasing from 26% to 32% of the total assets, and a lot of that is due to the new Florida acquisitions. The total number of active Centennial branches is 150 with 82 in Arkansas, 61 in Florida and seven along the Alabama coastline. In 2014, we closed nine branches, acquired 10 and opened one de novo branch in Naples, again for a total of 150. We ended the fourth quarter with a 41.87% efficiency ratio as compared with the third quarter of 45.70%. Our core efficiency ratio was ever so close to getting a 3, as Johnny said in front of, at 40.15% as compared to the third quarter at 41.88%. We'll have to try to see about that 3 sometime next year. This was very good improvement in both ratios. Consistency was the key to our success in 2014 and our core efficiency ratio average were around 41% allowing us to keep expenses in check. We continue to look for ways to improve this ratio as well as our overall profitability, and in 2015 we are implementing a grassroots effort towards meeting our strategic goals using cross-functional teams working together to improve the Bank. We've had success of this type of bottom-up team process in the past and we look forward to setting new goals for the future. Donna Townsell, our VP for Efficiencies, will be very involved in this project. In addition, we are making changes in both our investment and the insurance efforts as well as continuing to examine the look and use of our branches, as well as the use of our technology. I'm going to switch to deposits. We ended the quarter at $5.42 billion compared to $5.27 billion at the end of the third quarter 2014. Time deposits represented 24.3%, expanding just fairly under our 25% goal of total deposits. Net interest income, improvement in our margins and noninterest expense, I'll turn that over as usual to our CFO, Randy Mayor, to give you all the numbers. And after that, Randy will pass it to Brian Davis to give us a little capital information. So let's switch to Randy.

Thanks Randy. The net interest margin on a fully taxable equivalent basis was the same for Q4 as Q3 at 5.26%. Loan yields declined slightly from 6.47% to 6.41%, while the investment yields increased from 2.67% to 2.78%. The yield on interest-bearing liabilities improved slightly from 0.39% to 0.36%. The effective yield on non-covered loans was 5.89% in Q4 versus 5.84% in Q3, and the effective yield on covered loans was 16.53% in Q4 versus 17.23% in Q3. The provision for loan loss for non-covered loans was $5.4 million in Q4 versus $4.2 million in Q3. The primary reason for the provision continues to be the building of the reserve for the new and renewed Liberty loans which did not have a reserve due to the acquisition accounting treatment. Total noninterest income was down $620,000 from the prior quarter. Service charges were up $164,000. Mortgage lending was also up $440,000. The gain on sale of SBA loans declined $183,000. Gain on sale of OREOs decreased $266,000. And the FDIC indemnification accretion increased $492,000 and miscellaneous other income items decreased $236,000. Total noninterest expense increased $1.7 million. Salaries and benefits increased $543,000 with $357,000 of the addition resulting from the addition of the Broward Bank of Commerce staff during the quarter. Merger related expenses decreased $2.1 million from the prior quarter. Overall, we were very pleased with the ROA at 1.62% and the core efficiency ratio of 40.15%. Brian?

Thanks Randy. As of December 31, 2014, our Company reached a new milestone with over $1 billion of equity for the first time in our Company's history. In October, the Broward Bank acquisition was completed and we issued 30.2 million of capital to their shareholders. Also during the fourth quarter of 2014, we paid out shareholder dividends of 6.8 million and grew retained earnings by $23.2 million. For Q4 2014, our Tier 1 capital was $721.5 million, total risk-based capital was $776.5 million, and risk weighted assets were $5.7 billion. As a result, the leverage ratio was 10.3% compared to 10.2% at 9/30, Tier 1 capital was 12.6% compared to 12.4% at September 30, and total risk-based capital was 13.5% compared to 13.4% at September 30. Additional capital ratios included book value per common share of $15.03 compared to $14.42 at 9/30. Tangible book value per common share was $9.90 compared to $9.39 at 9/30. Included in this increase is about $0.10 associated with the tangible book value increase from the Broward transaction. Lastly, the TCE ratio was 9.5% compared to 9.1% at 9/30. Randy?

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

Thanks Randy. It was another great quarter on the lending side. We achieved solid organic loan growth while continuing to improve our already strong asset quality numbers. Led by a 10% improvement in our non-covered nonperforming asset ratio from 0.88% to 0.79%, all asset quality measures improved on a linked quarter basis. The allowance for loan losses as a percentage of non-covered loans decreased slightly in the fourth quarter from 1.11% to 1.09%. This is due to the loan growth I mentioned in the Broward Bank of Commerce acquisition. However, if you added all of the acquisition discounts to the allowance for loan losses, the combined figure would be 3.88%. Non-covered real estate loan decreased 12% on a linked quarter basis from $19.4 million to $17 million. This is the fourth consecutive quarterly drop since the Liberty Bank acquisition in the fourth quarter of 2013. Net charge-offs were up slightly to 23 basis points in the fourth quarter but the average for 2014 is still below 20 basis points per quarter. Early-stage delinquencies remained low at 1.24%. Organic loan growth exceeded $100 million in the fourth quarter which would be very close to 10% growth on an annualized basis. This follows the third quarter which was the strongest since before the downturn. In fact, gross loan production was actually 20% stronger in the fourth quarter than in that record third quarter but larger paydowns and refinancings held down that net gross number. In addition, there was a significant amount of unfunded construction activity that should fund during 2015. As I indicated on the last conference call, all of our regions are contributing to this strong loan production numbers and we are excited about the opportunities we expect to see in 2015. As you can see, we ended 2014 on a very positive note in the lending area and I want to thank everyone involved. It is the diligent effort of all of our lenders, assistance and operations staff that provides me the opportunity to report these very strong numbers to you. With that, Randy, I'll turn it back over to you.

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

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

[Operator Instructions] Our first question comes from Michael Rose of Raymond James. Please go ahead.

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

[Indiscernible]

You're welcome. Just a couple of questions here. First maybe if we can dig into the margin a little bit, it's flat on a reported basis, and if I'm doing my math right I think the core margin was about 4.65 and that's up about 10 basis points sequentially. Can you just give us a sense for what drove that increase in the core margin and what your expectations would be here as we move forward with the flattening of the yield curve?

This is Randy. There weren't really any significant changes in our impairments pools analysis that contributed to any of the fluctuations for the quarter. So it was pretty consistent from that basis. It does fluctuate depending on the activity in the loan pools as they payoff or rework. So we do have some of that fluctuation. But overall it was pretty consistent quarter to quarter and we don't anticipate there being anything. Now there always could be some different activity than what we got kind of modelled, but going forward it shouldn't vary too much. But I would imagine there still with the loan growth that came on, there will still be some pressure there on the margin a little bit.

Michael, I've got one thing to add. When we do our filings, we do those non-GAAP tables that are in the back of our 10-Q and 10-K. I'll go ahead and give you those numbers. While we haven't published them, we do have them ready. If you exclude all the purchase accounting entries that kind of juice the margin, the yield on allowance for the quarter was 5%, and the margin that we would actually have when you take out all the purchase accounting discount amortization, the margin was 4.20.

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

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

Okay, that's helpful. And then if I can just ask about kind of where the loan pipeline stands, obviously two very good quarters of organic growth but I just wonder what do you guys sense for, A, your [backfilling] [ph] in the pipeline, does it still remain strong, and then B, if you could kind of talk about where the growth came from this quarter if by market or geography?

This is Kevin. On the pipeline, I would say where we sit right now, first quarter is probably a little bit below fourth quarter last year. Even where we're at would not be a bad first quarter historically though. It's generally been a down quarter for us. From a geographic standpoint, it is really across the board as I said in the comments. It's pretty much every region is contributing. Florida is certainly coming on from a lending standpoint. As far as the type goes, I know there was a pretty good jump in the C&I lending group but that's not really, it's not a shift or a focus on that, we just had two or three deals that we were working on that happened to be in the pipeline that really jumped that balance up last quarter.

Okay, that's helpful. And one final one for me, which is more broadly speaking, I know you guys don't have a lot of direct energy exposure but any comments on how from a second derivative impact lower oil prices may impact you guys both positively and negatively?

I think the world is still [indiscernible] the same basket, [indiscernible] like banks right now, but we have one energy loan so to speak and outside that we have some in the [payable] [ph] shade that are self-liquidating. They are on a backburn program and they are self-liquidating. So we have very little exposure. Obviously it has impacted Texas banks substantially, [it seems like] [ph] it's impacted us. There appears to be a disconnect based on earnings and performance with Bank's stock prices. But the downside of that is that it makes banks cheaper. So from an M&A perspective, it may be good for us. It could be positive. So we're going to continue to look as we have been, we're busy and the consumer is going to have more money in their pocket, maybe they'll spend more, retail sales could be up, that's probably a plus. The downside to Texas, the downside to whole business remains to be seen. I was around when oil went from 50 to 10 and remember that trade and those opportunities, and if you remember over the last year or two, people said you're [indiscernible] Texas at $50 a barrel than I had at $110. So the jury is still out on what happens there, but we'll certainly watch it. If you remember in my [indiscernible] with a power, we bought power [indiscernible] just about $2 billion with the liabilities in that market. So we'll be looking at that from the perspective it's got to make banks cheaper. If you're a publicly traded bank, you had to get hammered in this market out here even if you perform the way we do, but it's been my experience that the good banks continue to be rewarded. So hopefully we'll continue to be rewarded, it may put us in a better position long-term to buy some of these or use our currency, but we still have all the handles to pull, we can increase dividends, we can buy back stock or we can use that capital. As you can see, the Company is generating lots of capital in a hurry right now.

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

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

I think it's too early for that. A banker was in yesterday, nice guy, came in yesterday and brought us a deal because his attitude was, we could pay more. I said, we're not going to do that, [indiscernible] we're not going to do that. Because we can doesn't mean we will. So the reality is that there are some deals out there may make some sense but it has to have some [indiscernible] on them to get a good deal, to get a good trade [out there] [ph] you have to find something that's got a little something messy in it but to work. The banks that are doing – we're better at [indiscernible] Liberty was – it was a pretty poor performer doing about 0.8 and we got it doing way over 1.50 now. You can see the upside. So we're kind of more guys that believe in bottom fishing out there and finding those deals that are – banks that are not performing very well that give us so much upside. The Liberty deal gave us $0.40 something, almost $0.50 in upside EPS, that was a game-changer. We are just looking for that next deal. What I'm seeing is not a lot of difference. What I saw yesterday was the highest price actually but I don't think that the dust is settled out there yet on bank process. So Tracy is still working on deals, so Tracy you got any comment on what you're seeing on the price of deals, it hasn't changed much, has it?

No, it hasn't. I think you nailed it right on the head. The activity is still there and we're standing the course and we're still busy.

Jon, when they are willing to [indiscernible] book on an earn-out that is loan and they are willing to dilute their EPS, no way they can bid against us to do that and how silly is that. I mean why would a guy dilute himself 5% or 6% or 3% and you look at the projections on the earn-outs coming fall to what the numbers are using on the earnings going forward and they are not realistic. So at least the bidding that we're bidding on, so we just continue to hold our course, we continue to remain reasonable, we continue to look at a deal that if it doesn't move the needle we are not playing. So we continue to do that and if bank stocks come down, we'll do more deals hopefully, price come down we'll buy back. So [indiscernible] really sitting in a pretty good position right now. I don't know if that answered your question.

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

I think you answered your own question. I think you said it pretty well. I think you [indiscernible] pretty well, we're going to do what's in the best interest of the shareholders and we're not afraid, we're not scared to death to go over $10 billion and they are making us do some things which is probably [indiscernible], again us ready for that because they expect us to do that, we'll start to spend some money on their behalf, so forming committees and a lot of operations going on here, discussion of operations. We haven't spent lots of money yet but we're spending some money on that, we're kind of going get ready for it. We find the right trade that makes sense, we'll go over it. I've looked at a couple, they just barely give us [indiscernible], barely just get us over it. I want to get us more than just barely over it. But if we're good in our price, if we find a deal like a Liberty, [indiscernible] have trades you can afford to do those deals.

You mentioned the technology investments in branches and maybe that's for another call but just back on the bigger picture thing, without acquisitions you typically have some stretch goals for the Company, and this is for you or Sims, but you talked about home $2 in the past, is that something we should still look at as a stretch goal or is there some other way to look at it or is there something else that you're thinking about that [indiscernible]?

I think it's realistic. I think it's where you're going to see us come out. I'm following on the table here. I think the word 'stretch' might be appropriate there but certainly that's where we want to be. I mean that is where we want to be. Now can we get there next year? I don't know. That's going to depend a whole lot on loan growth and our ability to generate organic growth within our Company, but just as we're not slowing down on the acquisition side, we're not slowing down on looking at things internally, looking at branches, looking at ways to increase loan growth. I was very proud of Florida last year from the standpoint of matching up with Arkansas and generating loans and really coming [indiscernible] regional banks back even though the days when they failed are three or four years ago but they are really starting to jam and become real banks and produce for us and I look forward to that in 2015. So we're looking at all the levers. As Johnny says, I like the way he terms levers. We're looking at everything and so you're not going to see us laying back, you're going to see us reaching for that goal but it might be a little stretch but we are certainly where we want to be.

We're $220,000 on the completion of amortization on the first program that we started. We did the Home $2 and Home $2.50, always puts a stop and we're like about 220,000 finishing that amortization up, and when that's finished up I think we'll create another one out there that started hitting the income statement again. So that's about – how much amount?

60,000 a month.

60,000 a month. So the second one, we'll still be out there amortising but we'll get rid of one, the first one. So we do that, you'll see us coming with a goal and as soon as that's it, and I don't know when that is, probably within the first six months or around that time, probably that will amortize out and we'll come back with the next program for the group, but that's kind of hint you got where we're going.

That's very helpful. Thank you.

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

I saw in the preamble in terms of targeting the efficiency ratio there, you're sort of approaching the three handle there, is that something that could enter in the lexicon as we think about modeling out in the 2015?

They are shaking their head no, I'm shaking my head yes. Let me tell you what they showed me. I look at every month and I saw one month was below with a 3 in front of it and I saw obviously that's kind of an average there, I saw two months with low 4, so with a low 4 in front of it. So I think we can get with a 3 in front of it, we'll keep pushing to try to get a 3 in front of it, that's my goal, we get something with a 3 in front of it. And I don't where we go, when we got below, we got something with a 4 in front of it, I was pretty pleased, and then we kept pushing and pushing and now we are down flat at about 4 and if we can get – I told them I'll take a 3.999999, of course I'm just selling at that point. Once we get to that point, we'll start pushing it down a little bit so it would be better. I'd say I'm never satisfied.

Why would you say that? No, he's never satisfied but neither are us. We are looking and doing and making some changes especially on the noninterest income side that I think is going to end up paying us some really good dividends down the road. There's a little infrastructure that we got to get through first, but as I mentioned we're making changes in the insurance, we're making changes in our investment side and we've brought on a head of our mortgage company, we're making changes there. So I'm really looking forward to seeing what our noninterest income can be this year versus last year but there is a little infrastructure we got to get through first before we really see the dividends come back to us, if that helps.

Got it, appreciate that color. And then sort of following up on Jon's question, maybe appending a follow-up there in terms of M&A, clearly some of your peers out there are struggling with the burden of the regulatory thumbprint as it relates to Bank Secrecy Act, am I under laundering any there, has that put sort of a shadow on your M&A efforts or change the way [indiscernible] from a compliance standpoint?

We've looked at two BSA problems and to say we walked away, we certainly walked away from one and we didn't, we're not really that aggressive on the second one. But our concern is that could get contagious. So we have kept our nose really clean, we work hard at that and we don't want to take a chance of something getting contagious. So from an M&A perspective on the banks that we've talked to and that we're looking at, with the regulators we're not concerned that that at this point in time, we think we do a pretty good job on that, we think they lack what we do. So that doesn't concern us. [Indiscernible] problems, we're probably going to circle around them for a while and see if they can get some of those resolved. There may be a deal where some of those guys if you can get it resolved with the regulators on the front-end, that you could resolve some of those issues then you could go to make a deal and clean that up and improve it and maybe have a good upside for the EPS. So that's always we looked to, to [indiscernible] problem because I said while we don't get a real deal you got to find something that's a little dirty and when you find something that's a little dirty if you could fix it without it getting contagious to the rest of your franchise then you might be able to make some money with it. Anybody got a comment on that?

No, I think you hit it. You cannot let it infect you, but yes, it is – we have systems in place and any acquisition that we can [indiscernible] will go to those systems and our systems are good ones, as Johnny said, we've had very good reports from the regulators, and so if the banks to be cleaned up by converting them over to us without infecting us then it would be an okay deal but if it's there and it's dirty and it doesn't look like it's going to get cleaned up for a while, we're not going to be there. We might circle around it like you said but we are not going to be there. We have a great relationship with our regulators and we trust them, they trust us and we are going out to do deal, we go see them first and lay the pro forma out of what we think is going to happen, what it looks like and whether it's dirty or not dirty and what we're going to do to fix it. So we lay all that out on the front end, we're not going to bite off more than we can chew, we're going to do the right size deals and we're not going to do a deal for the sake of doing a deal. I mean there is nothing wrong with being $7.5 billion and having good organic growth, paying a good dividend, and buying back your stock. So we don't have a gun to our head, we're going to do what's the right thing to do and we're not going to do stupid dilutive deals to our shareholders, and you've heard my statement, doing the diluted deals is like kissing your sister, you don't get anything out of that deal. So that's kind of how we look at those deals.

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

By the way I wanted to applaud you, Johnny, for keeping all those secret goals that you have secret from everybody else in the room and not spilling the beans on the call. Most of my questions have been asked and answered but I was noticing that mortgage fee income was up nicely, although it's still a small piece of the puzzle, up nicely in the quarter and what seasonally a weak quarter, and so I was curious I guess that's refi driven but I wanted to sort of dig into it and see if there's something going on with maybe refinancing in Florida because I know that there are a lot of people that were in Florida that were under water in their homes and as the housing recovery sort of took hold, it might take a little bit longer for them to actually participate in the refi wave, and I asked the question because I'm curious I think Michael asked earlier about the decline in energy prices, is that going to be, are there going to be some positives for you, I would think that lower gas prices might be a positive in Florida and if you could couple that with the potential to refinance with lower rates and higher valuations, could you have sort of a double barrelled stimulus in the state of Florida that might lead to more economic activity, more organic loan growth?

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

We hired Kevin responsible of course for all lending but he hired somebody to run that mortgage department who really focuses 100% on mortgage where he's drawing back and forward and I think that's been a plus for us and his total focus is mortgage. So I think [indiscernible] pay dividends for us.

[Indiscernible] we had a little bit of increase in margin, I think you're going to see that improve over time because of Michael's focus on mortgage. So it's several factors but it's not as much refinance related.

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

I'll probably go deeper in Florida. When you think about it, you have management on the ground, you have great special assets department that's seen every kind of crap that they can deal with in these eight failed banks that we bought, they know what the properties were, they understand, they know what legal counsel to work with and we've got great management on the ground dependent on where the opportunity was. So if it's something that hits in the panhandle or something in the keys or it would be pretty easy to do those transactions and dependent on whether management wanted to stay or not, we could take it or leave it because we have great management on the ground there. So that's probably the reason we're doing Florida. Now it wouldn't keep us from doing a Texas deal, I can tell you that. We did Texas with Broward, it's very profitable for us, it made a lot of money. It would be, as I said in the past, it could be a little distracting because somebody has got to go run Texas and hopefully if we buy the right deal down there then it will be a good organization with good management because we will be dependent on someone there. Does that answer your question? I think you're confused.

It's easy to make me confused, but that did answer the question. Thanks. That's all.

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

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

Want to circle back on loan growth. We've now seen some pretty good organic loan growth the last few quarters. It seems like a while back you hired a team of commercial lenders in Florida and that's not something you've done too often in the past. Can you talk about this lipped out strategy and is this something that you will consider doing in the future or just more of a backup plan in case you can't find the M&A deals you're looking for?

Matt, this is Tracy. I'll kind of answer the question back to Florida. I assume that goes back to the [indiscernible] days and [indiscernible]. They had a great year this past year, created [indiscernible] loans. [Indiscernible] has increased its staff with some outstanding talent and they have also began to produce there that really just started over the last quarter on their behalf with the northern Florida part has been going on throughout the year and all have done an excellent job.

Kevin, you got any comment?

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

And in essence we have done some of that recently with our new branch in Naples. That was a team that we kind of lived without and they really had a chance to perform but we're looking forward to seeing what they can do in 2015.

Giving example, Matt, this is Johnny, we started yesterday at 11 o'clock with a loan committee meeting and we had to stop at 1. We started back at 2 and I think we went till about 3, is that right? About 3. So there is pretty good loan demand. As Kevin told you, we had a lot of payouts in the fourth quarter, but the fourth quarter was better than the third quarter. I mean pretty amazing, the numbers of loans that we booked and we had some big payoffs and we got most of those benefits, we got one of them left out there, a smaller one, $10 million or $12 million that get paid off and we don't see a lot of big payoffs out there. So maybe if we generate, have a good quarter on the generation side, Kevin thinks we're up about 60 right now. That will change. So that's just stoning a needle in a wall again [indiscernible]. So we'll see what happens over the next two or three weeks or a month.

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

We're sitting on pretty good cash position right now at the hoarding company. We probably allocate, if we decided to do that, we'd allocate X number of dollars to go buy stock back and if we decided to buy and if it's cheap we just buy it and then we kind of like we did in the past, Brian Davis headed that, we kind of move in and move out. If we thought it was the right time to do it, we buy. If we thought it wasn't, we let it slide a little bit. So I think we still have 870,000 shares left in our [indiscernible] to purchase if we chose to. So I think we're in good shape there. The dividend, we got a little behind there, we had to [indiscernible] money for several years. You'll probably see us looking at that again. So that's kind of – as I said, we still got all the handles to pull, we're generating lots of capital in a hurry for our Company and the Liberty deal took a lot of our cash and we did that deal but we're back to 60 million, 70 million, somewhere in that range now. So we do a deal, we try to do a little cash and the rest stock, with revenues or stock, but I'd rather use all cash [indiscernible] issue more stock, I don't want to dilute anybody. That answers your question, Matt?

Yes, you did. Thank you. Appreciate it.

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

How are you doing today?

We're doing good. Other than our stock prices getting hammered, we're pretty happy with the performance.

Yes, it sounded like you might wanted to talk about that disconnect between the stock price and the performance, Johnny. I mean what do you think apart from what you mentioned earlier kind of being lumped in with everyone else to oil trade and what do you think is really pushing these stocks, just rates in oil?

I think it's rates in oil. I think they think that the rates are going to stay down forever and the banks are really going to get squeezed, and that could happen I'm sure, but the consumer is going to have more money in his pocket and as I said banks are going to get cheaper. So you know Wall Street, Wall Street loans you one day and takes you the next. So I don't know when it will be, it will be maybe June or maybe March they will lend us again. So they switch off the banks, switch in the banks and the big banks, I think some of the big banks had some misses and I think that set the stage for banks and we're really not in the same category with them. We're 32% in earnings and growing tangible book value fast, we kind of marched our own beat. So I think the street likes us and we'll recognize that at some point in time.

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

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

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

That's pretty much it. We see some stupid stuff from time to time, people coming and dropping down in the 3s, we even saw a 2. Actually we saw a high 1. You see some dumb deals being done out there but overall we're still rating in the 4.5 range, that's about where we're rating our loans and that's pretty fair. You do a fixed three year or five year fixed at 4.5% or you do fixed for a period of time and then float it after that, so that's fair, but you see people who don't have relationships in their marketplace and only way they can get business is buy it. So they think they're doing something by going in and buying the business. That makes sense but they [indiscernible] themselves on the chance to tell you all that they grew loans 300 million this quarter. The next thing is, [indiscernible] the margin. We find everyone and we work with every loan one at a time.

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

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

We're seeing Florida kick up and I think that lots of diversification, and we're seeing some stuff in South Alabama happening too with lot of residential going on over there. So kind of [indiscernible] diversification because if one falls down a little bit, the other picks up. So I suspect Florida will be extremely strong this year and in fourth quarter it was probably more than half but I would say going forward I don't know that it will consistently stay there.

Okay. And maybe one last question, this might be more for Donna but I know you guys had talked about a branch study last quarter that you were going through, I was wondering if you had any more concrete findings or determinations from that study, if you had any idea what branch cuts it might be coming? I'm always surprised that you guys can work the efficiency ratio down lower but curious as to what other opportunities are there?

That's an ongoing and a never-ending project that we continue to work. We have kind of a standard that we are trying to get to all our branches and the ones that are below that either have some time and have to come up with a plan to get above where they should be and to re-energize themselves or however you want to say it get to the standards that we have set. If not, then they're going to become a clear candidate to close. As I quoted, we closed nine branches last year and we're continuing to look at our list of things that may fit, whether it would be from a location that were too close to one another to just a non-performance or a lack of traffic, we're looking at that. We're also looking at different ways. You might see dabble a little bit into some new technology in some of our branches to see how that works. We'll probably start out and test it in a few places but we're definitely paying attention to the branches, looking at them and continually evaluating them. It is something that we look at every single quarter. To Randy I said, where we're doing branch studies, if you'll jump up and close about three real quick, you will get everybody's attention. And from thereon I think [indiscernible] improved performance and we'll close the rest of them. So we got about 10 on the bubble, [indiscernible] Randy?

Yes, sir, that's about the number, about 10 on the bubble.

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

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

Not [indiscernible] get some fruition but the amortization is gone. That was the one we really wanted to get done. We're still talking to them but that one we were [indiscernible] was really whacking us, is gone. That amortization has ended. So we have the [indiscernible] a quarter, $900,000 a quarter, every quarter, and that's gone. So we didn't get it done in time, so it's not a high priority for us today but we're talking about some other ones with the FDIC. So we really wanted to get that one done about June last year and we didn't get it done. So it's not a big deal anymore.

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

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

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

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

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

Most things have been answered here, we'll talk about that branch study, but maybe just a couple of things, the loans in the quarter, can you talk about what the production was versus the payouts as far as qualifying the payouts, how significant were they in the fourth quarter?

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

Okay, it was the production. Okay, alright, perfect. And then I guess just maybe back to Johnny for a minute on the M&A, last quarter or maybe a quarter before that you talked about maybe the deals you're looking at seemed to be more focused on larger deals and even you had potentially looked at one that was solicited to you in Texas, given what's happened any news on that Texas acquisition as part of still looking at it or just still the fact that you're more larger versus smaller that seemed the case today?

I had talked to on that larger acquisition in Texas and I said [indiscernible] and I said what are you getting [indiscernible], he said 65. He said but I don't think you'll get there. So we probably are going to wait and let the dust settle in Florida before – I mean in Texas before we go in there because there's going to be some repercussions of this. I mean there's going to be people losing their jobs and when they lose their jobs there's going to be repossessions and it's going to impact, it's going to have – I don't have much, Texas is not as oil dependent today as it used to be but it's still got a lot of jobs created from the oil industry and a bunch of those are going to go away. So I think we'll let the dust settle and we'll wait till the dust settles before we go in there.

Okay. And has it still been more of a focus on larger deals you think, is that still the mindset?

Look, prices got 12 or 14 deals [indiscernible] they don't do anything for us, they don't – they just don't move the needle and we're better now, but to do a deal that adds a $0.01 and we sell at 17 times earnings at $0.17, I mean really, we are going to take all your headaches and your liabilities and responsibilities, I'm just not going to do that. It's got to add something to our EPS, it's got to move our needle, it's got to impact this Company and for us to take those headaches and liabilities on. We want to do that, I mean it is certainly a focus of us, our Company, with Tracy brought me some deals and we run the numbers on them, and [indiscernible] Tracy. So we just move on to next. If we can't find a deal that makes sense, then we'll wait till they do make sense. They'll obviously come around, the deals will eventually come around and if we can still be rewarded for the power of our stock, it will give us an advantage in doing deals.

Okay. And would it be a surprise to you if you had to go to a new market, I mean let's say a new state outside of Florida this year as you await for some of the opportunities in Florida to come to realization?

There's two or three bigger deals in Florida that might make some sense but we're not afraid of Texas and what we looked at yesterday was an adjacent state but not one we were in or are in. So dependent on [indiscernible] if you're not ready to make a move with some of your talent into those states, if you buy a weak sister, you better be buying good management in those marketplaces. Because we've got strong management in Florida, so you could imagine we move in there and it's just we packet on to what our management team is down there, we got bad assets and we give it to our special assets. So it's pretty simple because you got lots of management there. If we did another Arkansas deal, we got lots of management here, that would be pretty easy to do, but if you go to another state it is going to be more expensive to do that than it is where we are particularly if it has got some [indiscernible]. That makes sense to you, Brian?

Yes, absolutely. And just maybe one easy question or two easy questions. You talked about maybe spending a little bit more and it sounds like that was more on kind of the fee income generation abilities but is that also compliance and I guess that's a issue with you a little bit more with the branch study?

The regulators don't want you to be there start getting prepared when you are over 10 billion, they want you to be there when you hit 10 billion. So there are some things that they are asking that they didn't used to ask for and they are not difficult things but sometimes it gets a little frustrating to spend extra money on something that you may not necessarily want to spend it on, but as we said before we're going to keep adding great compliance. We won't [indiscernible] up the Bank, not to worry about it, because we are in the acquisition business. So we pay attention to that and we are making moves towards becoming more sensitive to everything that they ask of us and you will see us spend a little extra money on that. Now some of the infrastructure costs that I talked about were investments in new areas like the expansion of our investment company and hiring new agents out there. So those are also things that we're doing where I said we got to get through a little bit of the infrastructure before we see some of the dividends come back. So we are doing that not only in our investments but we are also doing that in our mortgage company.

Okay, I appreciate the color, and maybe just a housekeeping for Brian, you guided in the table in the Q, Brian, you give a number, a purchase accounting accretion number in the ballpark of where that was this quarter?

You're talking about on the loans?

Just on the tables for the reconciling to the core margin, if you will, the core loan yields?

The margin ended up [4.20] [ph] if you take out all the purchase accounting, is that what you're asking?

Yes, that's fine. I can get it off-line if I need it but that 4.20 is the number, so thank you very much.

4.20 for the margin and it was 5% for the yield, and if you want the gross numbers, they were added back for the interest, it was 15.1 million.

Okay, that's perfect. I appreciate. Thanks Brian.

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

I just wondered if you could talk a little bit about the tolerance for higher loan to deposit ratio, and then also maybe what's your cash flow expectation is on the foreign securities and how high you can or to what degree that runoff in fund loan growth in '15?

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

What was the first question?

How high were you with the loan, I mean what sort of comfort or high watermark on the loan to deposit ratio before you changed pricing and didn't have to go on the offensive on the deposit side?

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

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

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

I was going the alternative, I was thinking you're willing to go to 103% loan to deposit ratio or is there a point where you have to say, okay we got to raise pricing and go get more deposits?

I think we don't mind going to 100.

No, we've gone over 100 before.

Yes, we were over 100 for several years. So that doesn't bother us. As long as we can remain efficient, as long as we can maintain our margin, we will run it up a little bit – we have got a lot of room to go there right now I think.

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

So all right, so the borrowings I guess, I mean what level are you comfortable with those increasing to as a percentage of your funding? I mean it looks like you're borrowing money overnight. Is that the bulk of the 200 million in growth linked quarter was overnight or you terminated that stuff out?

We are doing a little bit of both. Some of it's overnight. It's a long-term with floating and you could pay it back every month. So it's a little bit of mixed of the various structures from the FHLB.

We don't want to cannibalize our market. We're playing with some markets out there with maybe some different rates, we planned with that, should have it ready to go, we're pretty quick right, should be ready to go pretty quick. So we're going to play with some markets rather than cannibalizing our entire market.

Okay, that's great. And then maybe the outlook for the indemnification asset amortization, what would you expect the amortization to be over '15 as kind of a base case?

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

So I mean would you say out of the 19.5, is two-thirds a good number to count in '15 and the remaining one-third in '16, is that reasonable?

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

Okay, great, wonderful. Thank you for taking my questions. Congratulations on a great quarter and a great year.

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

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

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