Home BancShares Inc (HOMB) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Incorporated third quarter 2009 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks, then entertain questions. (Operator Instructions) The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC March of 2009. At this time, all participants are in listen-only mode and this conference is being recorded. (Operator Instructions) It is now my pleasure to turn the call over to our first presenter, Mr. Allison. Please go ahead, sir.

Good afternoon and welcome to Home BancShares' third quarter earnings release and conference call. Participating with me today in the call will be -- Randy Sims, Chief Executive Officer; Ron Strother, Chief Operating Officer; Randy Mayor, Chief Financial Officer; and Brian Davis, Director of Financial Reporting. First we would like to start off by thanking the investment community for favoring us with more than $100 million in new capital. In mid September our management team hit the road and was able to tell our story in face-to-face meetings to a world class group of institutional investors. After two days of meetings the group subscribed for almost $450, an oversubscription of five times for our offering. We're truly humbled and appreciative. We have been good stewards of our recent IPO proceeds and expect to continue to do the same with our new capital as we search for the best opportunities to deploy that capital. For the first time in several quarters, we finally had one without a lot of noise.

No one-time gains, no consolidation expenses, no special assessments, no bond sales, just a good, solid, clean quarter. The consolidation of our charter along with the 250 initiatives for all practical purposes have been completed. We announced in the second quarter strong income improvements from the first quarter to the second quarter, about $1.6 million, and I'm telling you today that that has continued and Randy will talk more about that in the future. We're doing exactly what we told you we would do. We're enjoying good asset quality and improving efficiency ratio and increasing net interest margins, healthy reserves and a fortress capital position. Such a capital position as to rank Home BancShares number one of publicly traded companies over $500 million with a tangible capital common equity ratio of over 13%. Now I'd like to turn the presentation over to our new CEO, Randy Sims, and the rest of the management team for their thoughts. Randy.

Thank you. This is a special time for Home BancShares and we are excited about some very good results for the third quarter. We reported at the end of the second quarter record results in our margin, net interest income, as well as our efficiency ratio. I am pleased to announce the momentum has continued and once again we have experienced record results for the third quarter. I will get started and then we will hear more from Randy Mayor, our CFO, on margin and from Ron Strother, our Chief Operating Officer, on loans. So let's go.

From a quarter-over-quarter perspective, our net income increased $675,000 to $7.2 million. Diluted EPS remained unchanged at $0.32. Cash earnings were also up about the same to $7.5 million, with cash diluted EPS at $0.33, down $0.01 but really due to rounding. Net income on a linked quarter basis had marked improvement, up $1.8 million from $5.4 million to $7.2 million, that is 134% improvement on an annualized change.

Diluted EPS reflected that same improvement moving up $0.08 from $0.24 to $0.32. Cash earnings were also up $1.8 million on a linked quarter basis to $7.5 million, again resulting in $0.08 improvement to $0.33. We were very pleased with these results especially on a linked quarter basis. This improvement in net income was the direct result of our ability to increase margin while controlling expenses. From a quarter-to-quarter standpoint, our margin was up 44 basis points from 3.82% to 4.26%. On a linked quarter basis, margin was up 18 basis points from 4.08%. Due to this margin improvement, we were able to realize an increase of $1.8 million in net interest income on a quarter-over-quarter period and $955,000 on a linked quarter basis. If you remember, our goal was to break 4% with our margin and we have surpassed that goal. 4.26% is an all-time record for Home BancShares.

Will this continue to improve? We anticipate some weakening for the next quarter due to our recent stock issuance. However, we continue to see opportunity on both sides of the balance sheet. Non-interest income did not improve this quarter but was still strong. Looking at a quarter-to-quarter basis it was down $183,000 from $7.8 million to $7.6 million. On a linked quarter it was down from $8 million. Fees and service charges were still strong but the corporation did experience a slower quarter in mortgage origination. As we reported last quarter, the completion of our charter consolidations plus the implementation of the initiatives from our efficiency study we named "Build a Better Bank" or B3 produced record results at the end of June in driving down our non-interest expenses. Again, we continue to see very encouraging results for this quarter end with non-interest expense improving over $1.4 million quarter-over-quarter and $3.2 million on a linked quarter basis from $20.3 million.

Admittedly, the second quarter included non-reoccurring expenses such as the FDIC assessment, but when you throw those amounts out, we improved over $1.2 million in core non-interest expense. Consider the combined improvement of our margin plus noninterest expense and you can see where we're headed. A very strong efficiency ratio. Throw out the noise and I am very proud to again announce an all-time record for Home BancShares of a core efficiency ratio of 50.15% for the month of September. Our Chairman has asked for something with a four in it and we can see from the trends we are very, very close. I guess the real question will be whether or not he'll be satisfied. We'll probably set another goal as you all know him. This efficiency ratio improved over 781 basis points on a quarter-over-quarter dropping from 59.25% to 51.44%, and that drop was improvement of 1130 basis points on a linked quarter basis from 62.7%.

The core trend is quite remarkable going back to March month end at 59.7% to June at 56.2% and 53.1% for August as we disclosed in the stock prospectus and then we see a core efficiency of 50% for the month of September. It started in the second quarter with overall improvement in margin, noninterest income and core noninterest expense of almost $1.6 million. And the momentum has continued in the third quarter and we have seen improvement of $1.7 million. As we have said in prior calls, we are anxious to see our run rate for the fourth quarter. We feel this will be a good indication of our potential and we anticipate some improvement over the third quarter as the final efficiency initiatives are completed, but certainly not at the same pace of prior months. Improvement in our metrics has produced an ROA on a quarter-over-quarter basis of 1.12% from 1%, an improvement of 28 basis points on a linked quarter from 0.84%.

Cash ROA on a quarter-over-quarter improved 12 basis points to 1.19% and the same 28 basis points from 0.91% on a linked quarter. These improvements have allowed us to meet net income goals and fund our provision for loan loss as we continue to clean up Florida. On a quarter-over-quarter our provision was up $2.1 million from $1.4 million as of 9/30/08 and to $3.6 million for 9/30/09. On a linked quarter basis we were still up $800,000 from a strong provision in the second quarter. As a comparison to loans our reserve is up 24 basis points quarter-over-quarter and down a little on a linked quarter but still very strong at 2.09%. Growth in loans was mixed ending at $1.97 billion with growth of $3 million on a quarter-over-quarter and a drop of $2 million on a linked quarter basis.

Deposits dropped from $1.91 billion on a quarter-over-quarter and from $1.83 billion on a linked quarter to $1.78 billion, increasing our loan to deposit ratio from 102% on a quarter-over-quarter and 107% on a linked quarter, to an ending 110%. While this ratio has continued to grow and our deposits drop, our strategy has been to protect our core customer deposits but to also continue to take advantage of wholesale pricing. We have not chased the high cost of public funds and non-core customer time deposits. As I pointed out, this has made a marked difference in the growth of our margin. And of course, liquidity has not been a problem due to our stock issuance and capital ratios. Our total common equity increased $106 million on a quarter-over-quarter and $103 million on a linked quarter to $397 million resulting in very strong capital ratios.

Turning to asset quality, our nonperforming loans and asset ratios both increased 94 basis points on a quarter-over-quarter basis. On a linked quarter basis, nonperforming loans decreased three basis points to 1.76% and nonperforming assets remained the same at 2.05%. Nonperforming assets, as disclosed in the stock prospectus, as of 8/31 was at 2.25%, so it's very encouraging to see that that drop to 2.05% at quarter end. That pretty well covers most of the numbers and I will turn it over to Randy Mayor to tell us a little bit more on the margin. As our Chairman has said before, Randy has been predicting a drop in margin for about five straight years and I think he might finally be right this next quarter due to the pressure from our stock issuance. Randy, tell us more about margin.

Thanks, Randy. Once again we saw nice improvement in the net interest margin for the quarter, up to 4.26% from 4.08% in the Q2. Loan yields improved seven basis points with some of the improvement attributed to lower non-accrual interest for the quarter, while liability yields improved 11 basis points with the majority of the improvement coming from timed deposits, which recorded a 22 basis point improvement. Given the additional stock offering proceeds, relatively flat loan growth and our current liquidity position, we are continuing our strategy of utilizing the most effective funding sources as not to disturb or cannibalize our existing deposit base. This strategy has resulted in a reduction of our time deposit balances. However, the majority of this decline has been in the area of public funds and bid CDs. We continue to use the strategy of working each loan and deposit to paying the best rates possible, while maintaining and building core deposit relationships.

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

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

Thanks, Randy. Let me touch on loan volume first. As Randy pointed out, our loans have shown little growth over the past year. Loans have held steady at about $1.97 billion, that's Q3 '08, Q2 '09 and Q3 '09. However, I want to point out it takes significant fundings to cover the payoffs in a portfolio this large. Maintaining this level of volume is significant in this economic environment. Touch on mix for a second. While real estate loans have held consistent at about 82.4% of the portfolio, total loans in Florida actually went down about $8.6 million for the quarter, while loans in Arkansas increased about $7 million. Florida loans now represent about 16% of our total portfolio, but still, about 68% of our MPAs. Let me turn to asset quality. Randy Sims has touched on a few of these. Nonperforming loans at 6/30/09 was 1.79%.

They had gone down three bp to 1.76%, but what I would tell you at 8/31 as we went on the road they were 2.10%. Also, nonperforming assets were flat at 2.05%, but they too were down from 8/31/09 at 2.25%. Touch on charge-offs for a second. In Q3 '09 they were $4.144 million, of which, $3.9 million was predominantly Florida and about $200,000 was in overdrafts. The allowance, it went down slightly from a 2.12% at 6/30 to 2.09% at 9/30. However, as I just pointed out, NPLs showed some improvement for the quarter also. I'll give you a little color on MPAs. We actually had a nonperforming credit go from OREO to sold in about a three week period. Unfortunately, it bridged the quarter end so OREO or MPAs were actually down slightly -- are actually down slightly now from the 9/30/09 number.

We have demonstrated once again that when we get through the legal process and get control of the property, we can conclude the liquidation process. As Johnny told you on the road, the ebb and flow of the collection process is continuing. On OREO, it looks like we called the values about right. And the net effect of the liquidations in Q3 '09 was about a $4,000 gain. It's our view that recognizing the fair market value and the liquidation value of the properties going into OREO is the key. Randy, that concludes my loan remarks.

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

Well, I don't think you left anything out. I think it was a good report. We talked at the second quarter that we might be seeing Florida head towards a peak. We didn't call the peak until we said that the first quarter of '10 we thought really the skies would clear. But as you can see, I'm not calling the peak now but we did see from August marked improvement, as Ron stated, to September and non-performings tick down. So they may have -- maybe somewhere in the August realm they may have gone up.

I just in summary want to say it was a great quarter. We talk about records, records, records, we ended up with a record third quarter net income, record efficiency ratio and improving and as Randy said, we showed a 50.15%, I think, for the month of September and we came out for the quarter at about, what you guys, 52%, 53% efficiency ratio. So you can see marked improvements there. If that holds, maybe we'll get to see a four handle. I'm pushing them that way and hopefully they will get us something with a four in front of it.

Record net interest income. We continue to maintain strong loan loss reserves. Net interest margin, the strongest we've ever had it in the Company, another record at 4.26%. As Randy and Randy both said, probably going to see a little pressure on that over the next quarter. Continuing to operate in one of the best 10 MSAs in the country and obviously a fortress capital position, probably the best in the country on the tangible common equity. As Randy said and I've told you over the past several quarters, look for the fourth quarter run rate, we think it will be good. At this time we would open it up for questions and answers.

(Operator Instructions) The first question comes from Jon Arfstrom at RBC Capital Markets.

Good afternoon, guys.

Hi, Jon how are you?

Hi, Jon.

Good, doing well. Maybe a question for Randy Mayor first. On the margin you talked about the worst case scenario of 17 basis points of pressure and my guess is there are things you can do to mitigate that and offset some of that and I'm just wondering if you can maybe walk us through what some of the options are to mitigate some of that pressure?

We're looking at that, Jon and some of it is that we will do some short-term investing to get a better yield on there. We do have some FHLB borrowings that are coming due that we'll be able to replace. That's kind of what I said was the worst case scenario. Hopefully we'll be able to mitigate that some by deploying it elsewhere.

Okay. Okay. Ron Strother, you talked a little bit about the charge-off numbers and I'm okay with math but it seems like when I add it up, you didn't have any charge-offs in Arkansas. Maybe negligible. Wondering if you can touch on the health of Arkansas because it seems pretty solid. And then maybe contrast it with some of the REO and NPL flows that you're seeing in and out of the portfolio in Florida.

Yes, some of these I want to point out first that we had had some provisions up, Jon, I want to take you back to 12/31/08 and if it was nonperforming then we charged it off. If it was performing we put some provisions in so a fairly large portion of what we actually took the charges on were in the provisions. The charge-offs for the quarter of the $4.144 million, that was about $4.491 million gross, we had collections of about $300,000. But Arkansas actually led the charge-offs, there was about $2.488 million in Arkansas. The vast preponderance of that was put up back at 12/31/08 in a specific provision and in Florida it was about $1.6 million. Florida, we tend to look at the value of the property, as you know. If it goes anemic and before we take it into OREO we'll get those things valued, if it's a short sale or otherwise. But this time the charge-offs, Arkansas was slightly ahead of Florida and we knew those credits.

Okay. That is very helpful. I appreciate that.

Jon, this is Johnny. I just want to comment that Florida is -- we don't want to get too optimistic but we've had a management change in Florida. We have a new President down there that's doing an excellent job, lady by the name of Teresa Condas, who is doing an outstanding job. We've got lots of eyes on the asset quality. I'm not saying we're through it and I'm not going to call us being through it until the first quarter of '10, as I've said in the past, but there's been some really good -- as I said on the road, we couldn't get the stopper out. We now have the stopper out and things are -- the ebb and flow is going in and out of there and we're able to sell it, so keep our fingers crossed. We just had another credit that was a pretty good sized credit. Ron just brought us -- told us about an offer and acceptance on it in Florida today. It's a pretty good opportunity, so things are looking -- we're beginning to smile a little bit. We're not -- we're not getting hit with one every week anymore.

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

Well, we -- there's about 71 banks that have a Texas ratio greater than 100 in our market area. This team has employed a third party. We're -- we're actually going to school as we speak. The teams are being formed internally. We've been working through the bid process. We are -- our people are going through the training process to take over a failed bank. We're getting everything done that needs to be done for this corporation to be -- to move. We are visiting with the regulators in the states to where we operate, as well as our lead regulators, as well as the FDIC. And I think you'll see this Company, as has been in the past, prepared to move when the opportunities arise. We are -- we are in talks with a couple of people right now, couple regulators right now and there may be some opportunities coming. Other than that, Jon, I don't know how far we want to go with playing our hand.

Yes. No, that's fair. I appreciate that. Thanks, guys.

Thank you.

The next question comes from Andy Stapp at B. Riley.

Great quarter, guys.

Thank you.

Hi, Andy, how are you doing? Thank you.

Hanging in there. You just touched on the Arkansas charge-offs. Could you provide a little bit more color on those charge-offs, what type of loans they were and that type of thing?

Andy, this is Ron. I've got to be careful about disclosing the customer. This is a C&I loan. It was both a receivable type loan and a building, a special purpose building. They struggled and weren't able to make it. We took the charge. We're in the process of taking it into other real estate owned but we non-accrued the credit and got an appraisal. We may have some recovery. We've got some raw land, about 60 acres, that has mineral rights on it. We've got a commercial building in north Arkansas right on a major highway. But the one particular asset we thought needed to be haircutted and that would be the largest charge, it's north of Little Rock.

Andy, we reserved that back in December as we went through our cleanup. I think we set aside about $1 million for that credit, Ron, is that right? Pretty close. So that was just -- we're way out in front on it. It didn't -- it didn't collapse until in the third quarter.

Okay. And can you provide any more detail regarding what you expect in cost saves or additional cost saves, I guess I'd say in the fourth quarter?

Andy, I'll let Randy Sims talk to that. We don't give guidance, but go ahead, Randy.

Yes, we -- I can't exactly predict what all will continue to come in but there -- we continue to work, we continue to work on some contracts. We've got some major contracts that are coming up for us with our core processor, with our debit card processor, with our check vendor. So we're continuing to work on things like that. There are a few branches that continue to need to improve and need improvement on what we think personnel-wise should be there. So, we're hopeful that most of the initiatives have been completed, but there still is a little bit of room for improvement, if that helps any.

Andy, I think Randy Sims reported to you that September was a 50.15. So you can kind of -- you can kind of play with that. I want a four handle and hopefully we could see something. I'm not sure we'll see a four handle the fourth quarter but we might. I'd love to see something with a four handle in the fourth quarter.

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

Ron?

Yes, the market's tough and there's some anemic banks. There's two very large anemic banks and their lenders are moving around, Andy. Obviously new projects our customers are cautious. But there are existing loans at two particular institutions that are 50 year relationships and our -- we've had opportunity to hire some of those loan officers. So in Arkansas, as you know, as you heard on the road, you were there, we're the tenth best. We're in the top ten MSAs in America. We're seeing the governor went to France and Germany last month to cultivate more people and out of that will be service business. So we think that we can get loans from other banks that are valuable relationships and we're trying to get anything new that's related to these base sector employers.

Andy, we could see a little consumer pickup locally here as HP hires. They've gone from the 1200 to 1500 employees. That hiring will be completed, guys, in the next 90 days.

Yes.

So we're going to see some -- we're going to see some pickup there. And we're probably going to see some pickup on the residential real estate side here also.

We also have a project here in Conway that has not funded that they're just getting started on so you'll continue to see a little bit of growth in Conway, so it's not completely dismal. We may actually see a little bit of growth early on and throughout the year.

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

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

It was 2.55% to total loans.

Okay. Great. That's it for me, guys.

Thanks, Andy.

Thank you.

Thank you.

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

Good afternoon, guys.

Hi, how you doing?

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

Yes, sir. This is Ron. The Florida portfolio at 6/30, Joe, out of $1.972 billion, $325 million is in Florida. It had gone down at 9/30, it had gone down to 16% portfolio. It was $316.739 million out of the same $1.9 billion. So it's about 16%.

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

Yes, sir. Real estate, non-farm, nonresidential, was about 100 -- you're talking about Florida now? Is that what you want me to (inaudible)?

Yes.

Florida was about $135 million in non-farm, it was about $47 million in C&D. One to four was about $93 million. That's the largest categories, those three, Joe.

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

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

Okay. Good. And then just lastly, any general comments, commercial real estate, what you're seeing there?

I keep waiting for -- everybody's looking around at each other at this meeting, we keep waiting for that shoe to drop that everybody tells us is going to drop. We just hadn't seen it. Ron?

Florida shouldn't -- I mean, we've worked -- we've identified all those. Arkansas, we're enjoying this influx and we don't loan on big boxes, Joe, and we don't do malls and we're just very fortunate that we have long-term relationships, owner occupied stuff. We just don't do a lot of spec, big box stuff.

Good. Thank you, guys.

Thank you.

Our next question comes from Matt Olney at Stephens, Inc.

Hey, good afternoon, guys.

Hey, Matt.

Hey, Matt.

Congrats on the quarter. I think you beat my metric on every forecast there. But --

Thank you.

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

I'll just -- last quarter, the average new CDs put on was about 166.

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

Yes, we do.

Yes, hold on just a second. Just one minute. For our September it was 430, for August 31st it was 427 and for 7/31 it was 422.

Okay. And lastly, Johnny, any new thoughts on a TARP payback? You have the equity offering. That's done, your capital's impressive. What are your current thoughts on TARP?

Well, I think we're drawing 25 basis points and it's costing us 8.7% pretax so the arbitrage is not very good. We probably -- we probably will pay off -- look at paying off probably half of the TARP money between now and the end of the year. I think that's probably something that the bank -- I mean, the group I talked to them about it the other day and I said why don't we think about just paying off half of that TARP money and Ron Strothers' comment was is that like being half pregnant. Why not go ahead and pay it off. We've got the money. The (inaudible) -- I think that things are improving somewhat. Excuse me, I think the rate of decline is slowing to a trickle.

This economy is by no means out of the woods and I don't know if we're in for a W or we're in for a U on the recession, so I'm hesitant to pay all the money back today. I know it's a little -- I know it hurts our earnings but I mean, we took it for a reason. One reason. And we took it for security for our shareholders and mainly for our security for our shareholders. So were we stupid in taking it then or are we stupid for paying it back now. I'm just not -- I'm a little mixed by that and the team's a little mixed by that. But I would suggest that probably we'd look at paying back half of it before the end of the year, Matt.

Okay. Thanks for the color, guys. Appreciate it.

Thanks.

Thank you, Matt.

The next question comes from Dave Bishop at Stifel Nicolaus.

Hi, good afternoon, guys.

Hi, Dave.

Ron, cut out a little bit, I think you mentioned that in terms of other real estate owned there was a subsequent after the quarter sale of some assets there, maybe you can talk about that.

Again, I've got to be careful. We had a 504 program where the SBA had $1 million behind us and we were secure from day one. It was in west Little Rock, the guy bellied up and we knew we didn't have a loss in it, but he filed bankruptcy on back to the court process again. We had offers on the property. We couldn't get title. We thought we were going to get it closed by 9/30, David, and it just didn't work. So we finally got title and sold it the next day. And recovered interest, cost, fees, all the stuff that you get. So we hoped it would be out of the 9/30 numbers, it just didn't work but it's back on -- it's gone.

Do you have the approximate size of that?

1.8.

Okay. Got you.

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

One final housekeeping. The restructured loan balance, wonder if you have that dollar amount?

Don't get me started on restructured loan balances. Don't get me started. As I told -- as I told somebody the other day that 25 years ago when I was going through a divorce, if you had been looking for restructured, names of restructured people my name would have been on that list.

Brian showed it to me today, David. I think Brian's got it.

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

Got you.

And those were little bitty credits, made up of 3 or 4 credits.

Couple paid off.

Predominantly my memory is Florida.

There's really only one credit in there that's about -- in that entire deal is about one credit in there about $10 million that's concerning to us, but outside of that that's the only credit.

Thank you, guys.

You bet.

Next question comes from Mark Muth at Howe Barnes.

Good afternoon, guys.

Hi, Mark.

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

A lot of real estate projects. We have some -- so far as OREO's concerned, we have -- we have two real estate projects, one in Key Largo and one in Islamorada. That's really it. That was -- it was about $16 million total project. We wrote it at the end of the year down to $8 million. We've had -- we took ocean front lots from $2 million down to $650,000. They are now on the books at $650,000. And a house that was on the books at $3.5 million, down to $1.7 million. So other than that, we've got a little bit in Key West, that one it was a restructured I talked about a while ago. It's about $10 million. That's really it. And there hadn't been any change in those during the quarter. Where we've seen the change is in the residential, primarily residential and some development property.

We were able to clear up about $1.7 million on a piece of property that I didn't -- I'd never heard of up until December last year. The loan had been on the books a long time. I went down and looked at it. As we were pretty aggressive on charge-offs, at the end of the year I didn't put anything on reserve on this one because it didn't need anything. It ultimately went to bankrupt. We finally got our hands on it. Went to auction and we collected every penny of our principal, plus legal, plus past due interest. That was about $1.7 million.

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

So we're seeing -- we sold a house during the quarter that was -- couple of houses over $1 million. Those $1 million sales have come back, which is encouraging to us. We're -- we're pretty optimistic right now, pretty (inaudible) -- we have the famous liquor store under contract for the fourth time and it may roll-out this quarter, hopefully it will. We had another credit that was about $2.5 million that looked like a major problem. It paid off -- $2.1 million of it paid off during the quarter and the other $400,000 paid off after the quarter. So you can see the little bit of optimism here coming from -- I'm not saying we're out the woods there yet but it's fairly encouraging.

Okay. Thanks, Johnny.

You bet.

The next question comes from [Chris Owens at Taft].

Guys, congratulations on a great quarter, very strong across the board. My question is regarding the FDIC assisted deals. Obviously you have a 13% TCE ratio and it's not because of you expect a lot of non-performing assets so -- again and congratulations on getting this opportunistic capital raise and I just wanted to sort of get your thoughts on sort of what you thought your cost of equity was at the time of issuance versus what sort of return you can generate on an FDIC assisted deal and sort of total asset size you could get to.

Well, the return on equity would be a lot greater than what we think the cost of raising the equity was by far or we wouldn't have done it. You know that.

Yes, exactly.

There's numbers all the way across the board on assisted deals from that very high teens to the low 30s, so you just have -- you'll have to model that one, Chris, yourself. Hopefully we could see a transaction where we would be somewhere in the middle of that range is what we would like to see.

Okay.

I think that -- I think that's about the best guidance I can give you. Anybody -- Randy?

So when you're pricing -- you said between 15% and 30% ROE, so when you're pricing your bid, are you sort of pricing it towards a 20% plus ROE? Is that -- ?

That's -- we would hope that we're pricing it in that area, we would hope so. We think we are.

Chris, this is Ron. We promise you we'll do better than Fed Funds.

Okay. I guess -- I guess my second question, stemming from that would be obviously having -- having TARP is kind of a nuisance and may carry some stigma, although I definitely don't think you guys are suffering from that right now. Why -- why take capital that could generate a 20% plus return to pay off -- to pay off 8.3% paper? You know what I'm saying? Why not just -- why not just use that capital and then FDIC if there's a transaction and it would be accretive to your return?

I agree with you. What, Randy?

That's one of the reasons we're not --

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

As an investor, I don't care. The highest return is optimal. So obviously you guys are -- have a great capital position and you've put yourself in a great position to do these acquisitions and seems like paying back TARP could go on the back burner if you could put this capital to such good use.

It's really -- Thank you for that. Thank you for that because we actually have put it on -- not totally on the back burner, but there's only been really one discussion among the management team about it since we got -- since we did the capital raise.

Okay. So bottom-line is from what you see is you guys think you can essentially add -- seems like you'd comfortably double your asset size and with a sort of new $2 billion in assets that could generate a 20% ROE.

We think --- we think we're approved for a little higher than $2 billion and -- but essentially we could double our asset size, that's correct.

All right. Look forward to it.

You bet. Thank you, Chris.

All right. Thanks, guys.

Our next question comes from Joe Stieven at Stieven Capital.

Good afternoon, gentlemen.

Hi, Joe.

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

This is Randy. We do have -- we continue to have some roll-off and we continue to have some opportunity for improvement. It's not as great as it once was but there is opportunity for improvement on the cost of funds. And as I said earlier, we're not chasing the high cost of -- of some of the competition. Actually, we're kind of seeing a lot of it in public funds, some really ridiculous pricing on a spot basis. So what we continue to do is to teach and to train our customer service people, our tellers, our managers, to look for that core customer, not to chase the high cost of timed deposits if they're a non-core customer but to look at that customer that's been there forever and for us to continue to keep them, to work them, to work them hard, but we are not going to chase the high cost of deposits. We just can't do it. It's been successful for us. We haven't lost a lot of business and you can see the result in our margins. So there's still some opportunity, to answer your question, and we will continue to work it hard.

Randy, we were pricing -- .

Yes, just as kind of a reference, the next 12 months CDs rolling off average yield is about 230 and we're repricing at 166 for the last quarter. So that can give you a little idea that there's still some room on the CD side. There's not much room on the checking, saving side.

And to be completely honest, any time we want to turn that spigot back on for deposits, it's pretty easily done.

Okay, gentlemen, thank you. Good quarter.

Thanks, we appreciate it, Joe. Come see us.

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

All right, thank you. This is John Allison kind of talking back on the TARP. We've accomplished really what we wanted to accomplish on the TARP. We got rid of half the warrants. I don't know if we got rid of them yet, but I think the capital raise qualified us for half of it and I guess Randy Mayors requested that to be done. It's in process. Brian says it is in process.

It was a good quarter. I think we've done exactly what we told you we were going to do. Look in our four quarter run rate, I think you'll see good improvement. Andy asked the question about what was -- how much improvement could we expect going forward. I think if you look at the -- something in the 50% efficiency ratio, I think that answers that question. So hopefully it will continue to improve as it has the first two quarters. We certainly appreciate your all's support and look forward to talking to you all in 90 days. Thank you.

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