Home BancShares Inc (HOMB) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Incorporated second quarter 2009 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company participants will begin with prepared remarks, then entertain questions.

(Operator Instructions). The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You'll find this note on page three of their Form 10-K filed with the SEC in March 2009.

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 participant, Mr. Allison.

Thank you, Mike. Good afternoon, ladies and gentlemen. Welcome to Home BancShares' second quarter conference call. With me this morning is Randy Mayor, our Chief Financial Officer, Ron Strother, President and Chief Operating Officer, Brian Davis, Vice President of Financial Reporting. And a new addition to our conference call is Randy Sims, President and CEO of Centennial Bank, the new merged entity.

The second quarter was a record-breaking quarter in almost all areas and you're going to hear about those record-breaking announcements on the call. A little less than a year and-a-half ago we, were visiting with our largest institutional investor and after 20 minutes of question-and-answer, he was very complementary of the performance that the Company had provided, but he had a request. He said the next time I see you, he called me Dr. Allison, Dr. Allison, the next time I see you, he said, I would like to have a net interest margin of greater than 4%. As you know, that was quite a chore, but we're ready to return and visit our friend as we posted a record 4.08% interest margin for the quarter. That took a real team effort from our group and they are to be congratulated. We pushed up asset pricing, lowered liability pricing and you can see that on the revenue side.

In addition to that on expense side, a little over a year and-a-half ago we announced a major efficiency study for our Company. You will remember that I was somewhat suspect of the forecasted annual savings number presented to me by the consultants. And to that point, I've never reported that number to the public. But I said if we could save half that much money, we would be a very happy group. As you will see in these record numbers for the quarter, it appears that the efficiency study has taken hold.

On a core operating basis, the second quarter was the best quarter ever in the Company's history. We recorded record net interest income and record non-interest income on a core basis, which resulted in the Company exceeding $30 million of core revenue for the first time ever, and almost $31 million. I think the number was $30.711 million. That's the revenue side.

Coupled with that is the lowest non-interest expense in the last five quarters. We're beginning to see the efficiency initiatives really take hold and that will show up more than ever on a linked quarter basis and we'll talk about that. As a result, a core efficiency ratio of a record 56.2, the best ever for a quarter. If you remember, it was a challenge when we wrestled to break 60. We finally got 60 down and we set a new goal of 55 and we did 56.2 and I think we may get there faster than I thought . And as you know how we operate, once we get there, we'll set the bar, we'll reset the bar.

This strong matrix has enabled the Company to continue to produce good operating numbers for the quarter which were $0.30 while building loan loss reserves to a record 2.12 as we continue to aggressively deal with Florida's asset quality. GAAP earnings were $0.24, plus $896,000 in merger expenses, and the one-time FDIC assessment of $1.161 million which equaled $0.06 which gave us operating numbers of $0.30 a share. This met the highest analyst expectations and exceeded all others. Congratulations to our team. More good news is the merger and acquisition is virtually complete. Very little of expense will we see in the third quarter. As I've told you in the past, look at our fourth quarter run rate. It should be reaching strong levels.

Let's go to the numbers. Net interest income, $22.7 million for the second quarter of '09. $21.7 million for the second quarter of '08, up $1 million. That was the revenue enhancement. That was a record $22.7 million was a record net interest income. Loan loss provision, we were able to put $2.8 million in loan loss this year versus $7.04 million last year.

Non-interest income on a core basis was up $256,000 from $7.7 million last year to $8 million this year. And non-interest expense was down $56,000 from $18.3 million last year to $18.2 million this year. These are on a core basis. So these are not smoke and mirrors and they have the one-time events taken out of them. Net interest margin jumped from last year's 3.89% to a strong 4.08% this year.

But even more so, look at the difference here on the revenue expense side on a linked quarter basis. I think this is very significant as you track our Company. Net interest income on a linked quarter basis from the first quarter to the second quarter this year was up $908,000. Non-interest income on a core basis was up $375,000. And non-interest expense was down $309,000.

When you add those three components up, you've got an increase in revenue of $1.592 million, swing from the first quarter to the second quarter. I think that is very significant and obviously the consolidation is taking hold in this company. And net interest margin moved from 3.93% to 4.08%.

Return on assets on a core basis were 1.05% for this quarter, 1.11% this time last year and 1.04% in the first quarter of this year. On a cash ROA, 1.12% this year, 1.18% last year, and 1.10% in the first quarter. So they're all remaining flat in there even though we put an additional $2 million in loan loss reserve this year. Efficiency ratio dropped to a record 56.20% from 59% last year and in the first quarter it was 59.71%, down 351 basis points to 56.20%. I think we can continue that and I hope we can continue to push that down over a period of time.

Loans year-over-year were back up about $22 million while total assets were down $32 million and deposits were down $70 million as we pretty well bled off the broker deposits that we had and ran off some hot money that we had inside the Company. Also, total common equity grew to a record $294 million. Loan to deposit ratio in the second quarter was 1.07% versus 1.07% in the first quarter. It remained basically flat. Loans on a linked quarter basis were up about $6 million, while total assets were down about $6 million, basically flat. And total deposits were down $4 million while the total common equity grew about $4.5 million to $294 million.

Allowance for loan losses, we grew it to 2.12%. We thought that was probably important to continue to grow it. We put about two -- Ron will talk more about what we put in reserves and what the charge-offs were. From last year at 1.87% in the first quarter of 2008. So we went from 2.08% -- excuse me, last year to 1.87% to 2.08% the first quarter to 2.12%.

Coverage ratio dropped to -- nonperforming continued to pick up in Florida to 119%coverage in the first quarter at 168%. And non-performing assets -- non-performing loans to loans went to 1.79% at second quarter of this year versus 1.24% the first quarter. A pretty good jump and Ron will talk about that in a minute. You asked me if it's peaked, maybe, maybe not. I'm not sure if it's peaked yet or not. I wouldn't have thought.

We had that range from 0.6% to 2%. We're at 1.79%. It could go higher. It could be a point higher, but I don't see it. You always wonder if it could.

Non-performing assets, the assets were 2.05% at June 30 versus 1.54% at March 30, up about 50 basis points.

Branches opened, Heber Springs showing good results. I think loan's almost $4 million in deposits and $2 million in loans. That's as we move further up into the Fayetteville shale area. That's doing well for us. We're very pleased with that.

Branches closed as a result of our efficiency study, we looked at a couple branches in south Arkansas, New Edinburg. We closed Kingsland with -- Arkansas was closed. We had two branches -- one of two in the Heights. With one really small branch, then one very nice large branch, we closed the smaller one and they were only a short distance apart. That was as a result of the Centennial acquisition.

That completes my prepared remarks. We'll go to Ron for a report on asset quality and loans. Ron?

Thank you, John. As John indicated, we had modest growth in Q2. Loans increased about $6 million for the quarter with the increase coming from previous commitments being funded. Loan demand continues to be relatively flat, as everyone is assessing how the global downturn is affecting their business plans. As Johnny said, we don't feel like we're under any pressure to increase loans outstanding in this difficult market, but we continue to seek good credits.

Touch on mix. We had a slight uptick in real estate loans. The loan funding was related to a multi-family construction project here in Conway that was previously committed. Asset quality, as John indicated, non-performing loans and assets both showed an increase as we continued to recognize, address and resolve the asset quality issues.

During Q2, we saw MPLs go up about $11 million. However, you need to look inside that number. Arkansas activity actually showed a decrease of $1 million while Florida was about up $12 million for a net change of $11 million.

We're beginning to see some favorable signs in the liquidation of other real estate owned. We have a single family residence under contract in Florida for greater than $1 million. We have a couple of foreclosure actions that are about to conclude in Florida and Arkansas.

The legal process has been particularly difficult in this economic turbulence. Debtors and the courts alike have lengthened the procedure. Once owned, we expect to liquidate these properties fairly quickly.

As John indicated, we added about $2.8 million to the provision for the quarter. We had charge-offs of about $1.8 million, net about $1 million and that left us with a very healthy 2.12% of outstanding loans. John, that concludes my remarks.

Ron, thank you for that report. We'll go to Randy Mayor. Randy, you want to talk about margins? Are they going up or down?

We saw a nice improvement in the net interest margin of about 15 basis points from 3.93% in the first quarter to 4.08% in the second quarter. It would have actually been a little bit higher, except for approximately $390,000 of non-accrual interest adjustments in the second quarter.

The asset side of the balance sheet held relatively stable with four basis point decline from 5.89% to 5.85%. Loan yields declined five basis points, but would have actually increased a couple of basis points had it not been for the non-accrual interest.

The liability side continued to improve, declining from 2.29% million to 2.11% million. And deposit yields within that component declining 23 basis points from 2.08% to 1.85%.

We continue to work on each loan and deposit to obtain the best rates possible while considering our funding needs which are primarily determined by loan demand. And as Ron mentioned, ending loan growth for the quarter was just over $6 million. However, average loans increased almost $13 million for the quarter. It appears that loan and deposit pricing is continuing to remain reasonable in most of our markets which should be a good indicator for margin as we go forward.

As we've mentioned before, during this economic slowdown, we're focusing on improving our margins and improving our internal operating efficiencies while addressing asset quality issues as they arise. Our expectations are that we will emerge from this timeframe as a much stronger and efficient organization, ready to take advantage of the economic recovery to come. That concludes my remarks, Johnny.

Randy, thank you. Good report. I thought I would give you an opportunity to hear from Randy Sims today who is the CEO of Centennial Bank and let him talk about charter consolidation and what he's seeing. Randy?

Thank you. It's a pleasure to report that all banks as of the end of June have been merged and consolidated into one charter as Centennial Bank. We are already experiencing the efficiencies of this decision. No longer will we have safety and soundness exams, six compliance exams, six external audits, six core system contracts, six separate websites, and the list goes on and on and on.

Our goal during these conversions was to minimize the impact for both the frontline employee and the customer. While the task was made easier by all banks being on the same core accounting system, many of our auxiliary systems were different and now have been standardized, allowing each user employee experience to be the same across our entire organization. And more importantly, allowing us to provide consistent and I might add the best in customer service.

The completion of these conversions, plus the implementation of the initiatives from our efficiency study we have named Build a Better Bank or B3 as it's better known as, are now and will continue to produce results in driving down our non-interest expenses and improving our efficiency ratio. It is our objective to have all initiatives completed and implemented by the third quarter so that we can see those results. That is all I have, Johnny.

Well, thank you, Randy. I think you see the earnings power of the Company. You can extrapolate from the linked quarter of what's going on within the Company. The good news is that we're hitting on all eight on the operations side of the Company. With revenue increase and expenses going down, that's where we want it to be.

Our Achilles heal has been Florida, and it is what it is. We've got to deal with it. We'll get through it. It's just a matter of when we get through -- have we peaked now or will we peak at the end of next quarter. And as Ron said, it's taken us a little longer than we anticipated to get this stuff through the pipeline. We're beginning to see some sales.

An interesting thing about the house Ron described a while ago, it was originally sold for one point -- $1.150 million or $1.2 million. I don't remember. And we thought we had a deal and the deal fell through. And then we -- the deal fell through and then two offers came in within 10 days or two weeks. One was a $1.3 million, one was a $1.375 million or $1.350 million -- somewhere in that range. And we sold it at the higher price.

Maybe we're seeing a little bit of bottoming down there. We think we may be seeing a little bit of bottoming on the residential side. We're not sure about commercial. We want to wait. I think I told you at the end of the first quarter we would take a look at the Company. We thought the skies might clear the first quarter of '10 so we're still optimistic that that -- we'll know a lot better about what we have by then.

I would like to say in summary that only about 15% of our assets are in Florida and 85% of our assets are in the stable Arkansas economy which by the way, Little Rock MSA is one of the top 20 MSAs in the country. And even though the Fayetteville shale has slowed some, we're well-positioned there. That asset is in the ground and as natural gas prices move back up, that will always be here for us for a long time and I think that play is 20 to 30 years. And HP is coming to Conway, Arkansas. I was visiting with the lead realtor in Conway last week and there is not one rental house available in Conway, Arkansas. One of our people was just contacted, there's 90 more people that they need housing for and there is no housing available at this point.

They'll either go to apartments or they'll be buying houses. Some of these people are buying. They're renting right now, getting their feet planted in the market and deciding if this is a place they want to live the rest of their lives. Also, Southwest Energy as we talked last quarter, it's headquarters is under construction.

Maintaining strong inside ownership and I told you the records -- you can pick what you want to pick out of this. But let me tell you, from an operational point of view it was record core efficiency ratio, record net interest income, record core non-interest income, record mortgage income, increasing loan loss reserves, record net interest margin and record operating results. It's just record, record, record for the -- and record capital. We still maintain our capital position.

I think at this time that summarizes where I think we are. We're going to open it up -- Mike if you would, for question-and-answer. Are you with us, Mike? Let's go to question-and-answer.

Yes, sir. (Operator Instructions). And it looks like our first question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Thanks. Good afternoon, guys. You guys hear me all right?

Jon, can you hear us?

I can. Can you hear me?

Yes.

Yes.

All right. Great. Sorry about that. Johnny, you touched a little bit about this in the tailend of your prepared comments -- about how you're seeing some bottoming in residential and you're not sure about commercial, but you think we might be close. Wondering if you can maybe give us an idea of some of the bids that you're seeing on some of the commercial properties that you own? Are they fair? Are they starting to come up and become reasonable again to where you're willing to part with some of the properties?

The good news is, we really don't have but one large piece of OREO commercial and it's the famous liquor store. We've had a buyer back on that liquor store for the fifth time or sixth time. Had seven or eight people with him the last time they toured. We're -- you know where we've written that to and we're substantially -- our asking price is substantially higher than that and no one has balked.

If we get that closed -- that transaction closed, it will be a nice transaction. As I told you earlier, we hope we'll have some recoveries. On the house that Ron and I discussed earlier, there will be a recovery on that house so hopefully we cut them deep enough when we did the deal to see some recoveries.

But the bids are -- the bottom fishes are in on some lower priced properties, probably houses are off 40%, be my guess. They were off 50%. I think they're probably off 40% right now. But the bids coming in right now, we're pretty pleased with what -- Ron, you want to comment on that? We're pretty pleased with those bids thus far.

As you know, Jon, we meet every Thursday and have full discussion with the full Board down there. It is strengthening. We are getting in that lower end -- we're getting some good movement on it. The commercial's hard to say right now, between the hotels and marinas and stuff. We hope, as Johnny indicated, we hope to see the bottom here in a quarter or two.

It will be interesting, Jon. There's a piece of property going to auction this weekend down there, a foreclosure action that we think we're very, very well secured in. It will be interesting to see how that comes out. We've had interest from several buyers. If we get it, it will be a home run for us and if we sell it, it will be a home run for us. Either way, it's a win-win for us.

Okay. Okay. Good. Ron, maybe a question for you, just in terms of the lending activity. I understand what you're saying where you're being cautious and maybe there's not as much demand in the market. But wondering if there's any change in the backlog or activity that you've seen over the last few months. It seems like some of the commercial customers are starting to get a little bit more comfortable and just wondering if you're seeing that at all?

They are. As Randy indicated, you look at the average, and it was up fairly nicely. At the end, it was only six. But I was talking to one of our guys in Little Rock this week and he's got quite a few million in the pipeline to close. Our customers are gaining more confidence and these are -- would really be interested in this line of business because it plays right into this recession. But we are beginning to see some customers start to move, Jon.

Okay.

We approved about a $16 million loan for campus housing at -- just off the campus at the university here a couple of weeks ago. That will be pulling up before too long so we're seeing a little activity out there.

Okay. Thanks for the color, guys.

Thanks.

Thanks, John.

The next question we have comes from Matt Olney from Stephens, Incorporated. Please go ahead.

Hi, guys. Good afternoon.

Hey, Matt.

It sounds like the multi-family problem credit in Conway is more of a one-off than an overbuilding issue in Conway. Is that right?

Yes. This is Ron, Matt. With the growth of UCA, whether it's coming from students, whether it's coming from the 1200 people going to be employed by HP, whether it be Southwest Energy, as John said, there's just an undersupply of housing here. John was talking about single-family detached residencies. There are none of them available for rent. This is -- I would submit to you, this town is as strong as any in the nation on employment. We're not afraid of any overbuilding in the multi-family.

Okay. And as far as the reserve build, is it safe to say we'll see increasing reserve-to-loan ratio as long as the MPAs increase for Home Banc?

I think that's been our history. You know our history. We'll err on the conservative side, Matt. We can build reserves. I think you saw the revenue side was awfully strong for the quarter, give us the ability to be able to do that.

As far as the capital --he TCE ratio's 9.3% which is a great amount in this environment. What are your thoughts on deploying that capital in terms of timing and in what manner?

We're probably going to file a shelf. We're looking at some opportunities out there. We'll probably file a shelf sometime in the next month or two. We think -- we're looking at what we think might be some opportunity.

If the opportunities come across, we may do something. If the opportunities don't come across, then we won't do anything. But so far as us stepping out at this point in time in the market and doing anything other than probably a real strong transaction or assisted transaction, as those assisted transactions are getting better, we probably wouldn't do that.

Can you give us a dollar range on the shelf filing, if you were to do that?

I can't give you that. I think it would depend on the deal.

We haven't set that yet, Matt. This is Randy.

But you are seeing improved quality in some of those -- or those FDIC problem banks in the pipeline. Is that right?

Say that question again.

I think you referenced that you're seeing improved quality in -- improved franchise value, I should say, in some of these banks that are troubled. And you could do an FDIC type of transaction with them.

I think that correct. I think that so far as -- depends on what the guarantees are -- depends on what we get as guarantees back on our side. Ron?

Matt, the first one that you know of didn't have a lot of juice here in the state. Now they are getting more profitable and I think that's where you're going. There's probably greater opportunity for us to take advantage of the franchise value and give a greater return. I think to some extent, the regulators have changed their method a little bit.

Okay. Great color. Thanks, guys.

Thanks.

The next question we have come from Andy Stapp of B. Riley & Company.

Hi, guys. Nice quarter.

Thank you, Andy. Good to have you with us.

You touched on the possibility of further margin expansion as well as some additional expense reductions. Could you provide any more color on those two items?

You're going to get these guys around me swinging at me in a minute, Andy. We were able to break the 60 and I think we're going to break the 55 on the efficiency side. The next step will be 50. That will be the next goal is 50. And before we're through, I'd love to see something with a 4 in front of us and I don't care if it's a 4.999. I think that as good a bank as we are, we ought to be able to get to that level sometime in the future.

We have not rung all of the efficiencies out of the Company yet. All of this is really happening and as I told you I wasn't sure that these consultants had their -- were just maybe blowing a little smoke to us. But it appears that this thing is working pretty well and we've still got a long way to go with it. I think you can look at our fourth quarter run rate and I believe that will be the -- that will tell the tale.

Also, on the -- we started out back, what, guys, nine months ago on the margin side and started really working on the margin. We don't do prime loans and we don't do prime minus loans and our floor is 6%. That's our best rate for our best customer. And we continue to reprice as these loans continue to reprice. I don't -- I'm sorry, I don't have the numbers -- what we reprice in the next six months, but I think it's fairly significant and hopefully we can continue to push that margin up.

Is it conceivable that we could see a 4.25% margin? I think that's conceivable that we could get there. The Company's focused on it and everybody's working hard on it.

Okay. Is my understanding correct that you're not anticipating any more charter consolidation expenses?

Andy, there might be something that -- always -- you never say never. But Randy Mayor went through it at the end of the second quarter and there may be something that slipped through -- that will slip through into the third quarter. But as of right now there should not be any more charter consolidation expenses. If they slipped through, they will be minor. Randy?

I would agree with that.

Okay. And what do you see for the effective tax rate for the balance of the year?

Brian, you got -- ?

It was a little over -- about 29% for this quarter. That will be a little bit low going forward because our earnings were down. Our marginal tax rate is 39.225% and our earnings should be stronger next quarter without the merger and the FDIC. I'll look for it to be between 31% and 32%.

Okay. And that's all I had. My other questions have been asked.

Thank you, Andy.

Thank you.

The next question we have comes from Dave Bishop of Stifel Nicolaus.

Hey, good afternoon, gentlemen.

Hey, Dave.

Question for you guys, just in terms of some of the color, maybe give some additional color in regards to some of the new in-flow, in terms of non-performing loans and loans 90 days past due. What gave rise to that increase?

David, this is Ron. The largest was $2,052,000. It is a single family residence in Florida. We had a subdivision locally here. The rest was commercial Florida, commercial Florida, single family Florida, commercial Florida, so it's -- from a Fed line category standpoint, I would say it's about even in dollar amount, predominantly Florida.

And last quarter you discussed some of the restructured loans. I think it was $18 million, $19 million or so. How are those loans performing relative to the renegotiated terms and rates?

Yes, this is Ron. I'll take it again. We -- all of the performing ones are current and paying as agreed. The longest delinquency was about 29 days. From our perspective, and Randy Mayor and I talked to the Fed about this, we believe it's our duty to work with these customers, David, and try to keep them in the property as long as we can. When we do that and they stay current, it means we made the right decision.

Did any of those slip into non-performing status or are they still restructured?

I see a $308,000 added and about $1.6 million resolve that could not pay. Nominal that was added that could not pay that slipped to non-performing in the renegotiated category, if that answers your question.

Yes. And then in terms of deposit service charge activity, that had a nice boost. Looks like it can be somewhat seasonal. Are you seeing any aspects from a consumer standpoint that -- it was asked the last question in terms of commercial viewpoint if people get a little more optimistic. But anything from a consumer side that leads you to think we're bottoming? You see more spending activity or anything else that may give rise to that?

This is Randy Sims. Here in Conway, with everyone come into it and I think Johnny alluded to the fact that there's not a rental house available, we're seeing some spending. It's good to see. Business is doing better. Conway's a little bit insulated with all of its economic activity. I think you can say the same thing for some other parts of Arkansas that are continuing to see new businesses open up, especially in and around the Little Rock area. We're optimistic. We're a little -- that optimism is a little cautionary at this time, but things are looking and doing better.

It really never -- David, as you know, Arkansas, Conway held pretty strong. It never really fell off. Maybe slowed a little bit. I think revenues, city and county revenues are still up. I think they've been up month over month -- or year-over-year. They've continued to be up so we really haven't felt it.

May see a little turn down from the $3.50 natural gas impacting us some, but that too shall change at some point in time and go back to $6 or $7. But the HP picked up whatever slack dropped off on that. The strip centers are full and the restaurants are full and the warehouses are full. Arkansas is not really a good indicator of the fall-off because we really haven't had that kind of fall-off here.

And that all relates -- this is Randy again. That all relates to some of the increase you're seeing in our revenues from the standpoint that our mortgage lending is still strong. Our transactions and our branches are continuing to grow and some of that non-interest income is -- we're continuing to see some of the same patterns that we've seen over the past few years, month by month and a little bit of increase in it.

It will be interesting to see how -- what happens to mortgage income the second half of the year with rates ticking up a little bit on the 30 year, see if that slows it down. It could, but we had record income in the first quarter and beat that in the second quarter on the mortgage side. It's still strong but I think with rates going up, that could slip a little bit.

From a -- you alluded to in terms of broker deposit runoff. Where do they stand and secondly, in terms of your cost of new deposits -- timed deposits versus the average rates of the quarter. Is there a -- still an appreciable difference there to be realized in terms of the funding cost?

David, this is Randy. Total brokered's around $77 million. But $44 million of that is through the SEDAR's program which is a two-way swap, what we call a real [true to boat] brokered deposits would be around $33 million. As far as the repricing opportunities, there is still some on the CD side. As I mentioned in my comments that pricing is still pretty reasonable. We still do have a little bit of room on there, not much on the non-timed deposit side. But the timed deposit side does still provide us some opportunity.

Great. Thank you, guys.

Thank you.

The next question we have comes from Joe Fenech of Sandler O'Neill.

Good afternoon, guys. Hey, Ron, do you have the dollar balance of loans outstanding in Florida at quarter end? And then, what was it last quarter end? And then secondly, of your -- call it total construction and land loans, about $350 million we'll say, how much of that would you say is Florida?

Hi, Joe. This is Brian. I actually have that in front of me. For Q1, it was $328 million total loans. For Q2, it's $325 million. And then you wanted to know construction?

Yes, of the $350 million total construction and land, how much of that would you say is Florida?

$47 million.

$47 million?

Yes.

All right. Thanks, guys.

Thanks, Joe.

The next question we have comes from Kevin Reynolds of Wunderlich Securities. Please go ahead.

Thank you. Good morning or sorry, good afternoon, gentlemen.

Hi, Kevin.

Hi. Johnny, I've got a question for you and everybody can -- if it's okay, maybe everybody can offer their opinions, too. But -- and maybe this will be a challenge as well. But without using the baseball analogy, can you comment on how the environment feels? Generally speaking, it seems to me at least that the environment out there feels different than it did this time last quarter.

Would you concur in that? Can you characterize it? And then maybe talk about if there's anything that has surprised you over the course of the second quarter up until now, for better or for worse in terms of the way this -- the credit cycle and the consumer and commercial sector are all playing out right now.

Surprised me. Florida's aggravating to me -- aggravating with -- I'm ready to get to the bottom of that. I think I was aggravated with getting our hands around some of those properties. I think that is aggravating to me. I want to get them cleaned up. I want to get my hands on them, get them sold, get them gone.

From a positive side, the expense reduction for the Company and the revenue enhancements for the Company were really a plus, a huge plus. When you have $1.6 million swing in a quarter, that's a pretty good swing for our little Company. And you add all that together, it's about -- it generates lots of earnings power for us. From a surprise point of view, that was your second question. I don't remember what your first question was.

Sorry. It was just to characterize how the environment feels today without using the baseball analogy. But just using real terms on the ground for your customers, for your loan officers, for your credit folks.

I think the environment is caution. I think it's more -- everybody's more cautious than they were. They're really looking at good projects. We're not seeing as much at the loan committee basis -- at the Board level as we used to see because it's being shutdown at the bank level because they're just -- these credits in this environment. Number one, we're not seeing them. Our customers are being cautious. And number two, we're not approving those credits.

It is -- we had one yesterday that was -- I said, we have enough hotels, motels, we did $1.3 million -- $400,000 cash down and the balance SBA, 90% guarantee. We're doing those kind of transactions. But I think overall just caution, that's what I'd say, just caution. Ron?

Kevin, let me touch on Florida. You really raise an interesting point about the environment because when the season is in, everything's great and it's full and everything's going. And I think the reason we believe that we're -- we may see better where we are -- before year end or Q1 of next year. If these people make it through the off season and they're able to pay and can stay in the houses and stay in the hotels and whatever, then they will have made it through the roughest times. Once we get in quote, unquote the season again, those people that made it through are probably going to mature on out. And that's what the frustration has been, is finding that bottom.

Do you think that we're -- from here, looking at the coming offseason, do you -- does your gut tell you that that's going to be worse than it was or maybe the same or better on a year-over-year basis?

I probably -- I'll relate it to what I think non-performing's going to do. As we have some opportunities to sell some stuff, there will probably be some more stuff coming. Is it at a peak number? It could be if we can get the stuff out the back door. There's probably more coming. If we knew where it was, we would already have it on there but -- as we do because we don't mess with it. We bring it in.

But I would -- we could be non-performing for the third quarter -- could be up a tick. It could be down a tick. Do we have more potential out there between now and the end of the year? I think Ron summarized it pretty good, on the offseason, probably between now and the third quarter, we'll see it. It's a slow time for the Keys.

Kevin, we're getting it out the bottom of the bucket. It's been coming in the bucket and the courts are allowing us to resolve some issues. If we can get it going out the bottom of the bucket, then we'll be in better shape and that's what we're beginning to see. We're cautiously optimistic that we're going to get some of this OREO going.

Okay. And then one last one just to make sure I understand -- am I hearing you all say that based on your lengthy experience in the space, the banking industry that there's nothing that you see right now that suggests -- no evidence that suggest that credit quality is still getting out of control, either for you or for those around you? The market, though it may be stabilizing (inaudible) moves a little bit around the central tendency here.

I would say you're correct.

We run our bank, not their banks, Kevin. I don't know about the whole market.

I was going to say, understood, but some actions that they take at their banks might influence yours.

That's true.

Good quarter, guys.

Thanks, Kevin.

The next question we have comes from Dave Bishop of Stifel Nicolaus.

Hey, guys. Ron, a follow-up question. In terms of the total MPAs, is it possible to break those down on a dollar basis between Florida and Arkansas?

Brian --

I've actually got that. 68% of our MPLs are in Florida which is about $24 million. And the total MPAs is about 70% or about $37 million.

Sorry, 70%?

Yes.

$37 million?

And David, that's where we're beginning to see some movement in those things that have been past due so long and we're getting through the courts.

Virtually all of the increase this quarter was in Florida for the MPLs.

Actually, Arkansas went down by $1 million.

Great. Thank you.

Great. Thanks. Mike?

Yes, sir. It looks like we're showing no further questions.

Okay. No further questions. Mike, am I live, Mike?

Yes, sir.

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