Home BancShares Inc (HOMB) 2010 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated, third quarter 2010 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. The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K, filed with the SEC in March, 2010.

At this time, all participants are in a listen-only mode. And this conference is being recorded. It is now my pleasure to turn the call over to our first presenter, Mr. Allison.

Thanks, Andrea. Welcome, everyone, to the third quarter Home BancShares conference call. I've kind of been on the disabled list for the past month. Had a little knee surgery, so I've been watching from the sidelines, except for the bid process on the failed bank transactions, I've been involved in that. Randy will talk more about that today. With me today is Randy Sims, our CEO, of course Randy Mayor, you know Randy. Brian Davis, Kevin Hester and Bunny Adcock, our Vice Chairman. I don't have a lot to say today. I'm pretty proud of the group. They did an outstanding job for the quarter. Margin improved, revenue improved, efficiency ratio was good. Even with the additional expenses that we incurred quarter to quarter, looks like we're up $2 million on non-interest expense.

Little concern of mine, but it's new. We're a lot bigger than we were, and we took on a lot of expenses. We're pleased with what we've done with expenses on both Key West and Orlando, and we'll be cutting those expenses in these new acquisitions before too long. Speaking of acquisitions, Wakulla was the last one we did. We're proud of that acquisition. We didn't pick up, as Randy will tell you, I'll talk a little about it, we didn't pick up any non-performing or OREO in that deal. It may be the best one. It could - has the possibility to be the best one that we have done thus far. Has strong market share and it enables us to move into the Tallahassee market. I was hoping we would be able to announce another one to you today, but I think we will be back on the phone with you here before too long talking about another deal. We'll probably look more at strategic transactions in the future, and transactions that add on to our existing franchise. And that's really all the comments I have. Great job to management for the quarter. Randy Sims, our CEO, I'll turn it over to him.

Thank you, Mr. Chairman. I said this last quarter on the conference call, and I'm pleased to be able to say it again. Even with what is happening in the economy, once again, we're able to report record results. Our focus has been to improve both our earnings and our asset quality, while continuing to be very active in the pursuit of FDIC acquisitions. As you already know, we've been extremely busy and successful with both endeavors. It was a very good quarter for Home BancShares, so let's get into it. Our third quarter earnings were $9.6 million, or $0.31 diluted earnings per common share, as compared to $7.2 million, or $0.29 diluted earnings per common share for the same quarter in 2009. This represents a $2.3 million, or 32% increase in the earnings in 2010 over 2009.

Last quarter I also announced that if you take the noise out of the onetime gains from the FDIC assisted acquisitions out of the quarter, and just kind of compare normal operations of prior quarters, the base net income of $9 million in the second quarter was the best we had ever seen as a corporation. Well, that's no longer true. Let's do the same thing. Let's take the noise from our acquisition gains out of the totals, and you end up with what I already said, $9.6 million base earnings and once again this is the best quarter we have ever seen as a corporation. And that has been the story of 2010, each and every quarter. And there's more. This quarter we had record quarterly net interest income, a sub-50 core efficiency ratio, and continued growth in our net interest margin. Again, it is really nice to be able to announce record-breaking results each and every quarter.

So, those are the highlights. And so before I get to some more of the numbers, I'd like to take just a minute, and discuss and update you on our acquisition, and tell you a little bit about our overall strategy. We've been very fortunate to have been selected the winning bidder, on five assisted transactions this year. In fact, since March, our assets have grown from approximately $2.7 billion, to just shy of $4 billion. Okay. I am taking a few liberties with that just shy of $4 billion, and the accountants are already looking at me, and I am rounding up a lot. Maybe it's only $3.7 billion, but $4 billion sure sounds better, and we'll get to that number shortly with some future acquisitions.

Now that we've been awarded five banks, with hopefully more to come, let me just describe our acquisition strategy and how it all works. At closing, Centennial employees are deployed to each location to help with the initial transition. Tracy French, that we've talked about before, our regional President from Cabot, and who has a history of fixing failed institutions, is deployed as the new bank manager. The bank manager, Tracy, works with the institution until a market president is chosen. Loan teams under the leadership of our Chief Lending Officer, Kevin Hester, evaluate the portfolio, and set up a working special assets department with existing, or new personnel, under the direction of Marisa Langford, formerly head of our loan review. Loan responsibility and reporting is assigned, and loss share procedures are implemented. And the process of cleaning up the assets begins.

A loan committee structure, that includes the Centennial regional chief lending officers, is also implemented. The loan committee meet weekly to discuss any new or existing loan renewals. Until our loan culture has been established, there are no loan authorities at any of these new acquisitions. All accounting is centralized under Randy Mayor, our CFO, along with outside consultants and accountants, the loss share structure is implemented. Within a short period of time after closing, the conversion of IT systems begin, and a separate project team, under the leadership of project manager Brian Jackson, trains, implements and converts. This process is completed usually within four to six months. And then our last step, is the training of the branch staff, and the business development officers to transform this institution into a viable and growing community bank that fits with our culture.

Now let's look at the acquisitions. Our first acquisition was Old Southern out of Orlando, Florida. Our strategy has been implemented, and it is now under the leadership of Market President, Steve Revere. Due to efficiencies, we have closed one branch leaving us with six branches in very good locations. The bank has completely converted over to the Centennial processes, including our data processing system, and it's becoming more profitable each and every day. Acquisition number two, was Key West Bank. It was just a natural fold-in to our [Goodson] Keys region under the leadership of (inaudible). The branch has been converted to our systems. It's very profitable, and it is actually our best branch in Key West, out of the three that we have. It's got very good traffic, and of course it's just one block off the famous Duval Street. Features a good mix of lobby, drive-through and even outside walk-up business.

We have had virtually no run-off of the core deposits. Both the Orlando and Key West acquisitions are performing well above our original expectations, and we look forward to how they perform. In July, we added two institutions in the Florida Panhandle, with Coastal Community Bank and Bayside Savings. It gave us 12 branches stretched across the coastline, from Panama City Beach, to Carrabelle. Some beautiful destination communities with a great market share, such as in Mexico Beach, Port Saint Joe, St. George Island, Apalachicola, and yes, it took me a while to learn how to say that, and others. As with our other acquisitions, we have implemented our strategy and our processes, and today, we are announcing two market presidents that will lead these community banks forward.

And then just recently, on October 2nd, we were awarded Wakulla Bank in Crawfordville, Florida, as Johnny calls it. Just up the road from Carrabelle, adding 12 more branches, including very good locations in Tallahassee. And I might add a modified purchase and assumption agreement, that removes all the non-performing assets out of the portfolio. It would appear it is our best acquisition to date. We were well positioned as a bidder with Coastal and Bayside, to make this just a natural extension of our market. What a great transaction. All three of these acquisitions are deep-rooted community banks that will fit in well with our culture. Our Panhandle presence now stretches from Panama City Beach to Tallahassee, and it's starting to look like we are really putting together a wonderful franchise.

So, let's back up. How do we look today? Well, we've got 43 branch locations in Florida. As I said, in great destination cities, in the Panhandle, central Florida, the Florida Keys, and a small presence on the west coast. And then 49 branch locations primarily in central Arkansas. This is certainly a special time for us as we continue to grow and expand, while continuing to set records in our income and efficiency. More importantly, our staff and personnel are really enjoying the challenges and opportunities, and we're becoming closer together as one single team. All right, let's get back to our overall results. As I said in the beginning, this was a very good quarter for us. I've already mentioned, that we had all time record base earnings from normal operations, and an overall 32% increase over earnings in 2009. That resulted in dilutive earnings per share increasing $0.02, from $0.29 to $0.31. On a linked quarter basis, net income increased $603,000, from $9 million to $9.6 million or $0.02 diluted earnings per share.

We are very, very pleased with these results, especially given the fact we are seeing good and encouraging results from our acquisitions. Let's talk about another all-time record for the corporation, our net interest margin. On a fully taxable equivalent basis it finished at 4.35%, up 9 points, as compared to 4.26% in a quarter-over-quarter basis. That was an all-time record. And not far behind that, was last quarter, which was an all-time record at 4.3%. All that adds up to the fact that we are continuing to maintain and improve our margin, as we work hard to improve pricing on our deposits, and to hold the decline of interest rates on earning assets. In dollars, it was a 27% increase, to $30.2 million, compared to $23.7 million for the third quarter of 2009. Even in this time of slow loan growth, we believe our strategy of holding our loan rates up in excess of 6%, continues to pay dividends to the corporation.

Since the first of 2009, the entire Company has been focused on getting our margin up over 4%, and the progress has continued throughout the first three quarters of 2010. Again, as I said over and over, with all-time record results each quarter end. Non-interest income was up on a quarter-over-quarter basis, 9.8%, or to $8.3 million. This was a very strong quarter for us in this area, but it was a little confusing with items such as FDIC accretion, a loss on the sale of OREO, and then some other adjustments, in addition to our normal fees and secondary market origination income. Non-interest expense on a quarter-over-quarter basis was $21.3 million, compared to $17 million, for the third quarter of 2009. But of course, we are a bigger organization with our acquired institutions. On a linked quarter, it went from $19 million, to $21.3 million. Perhaps the better measuremen, and the one that we concentrate on, and that factors in the additional acquisitions, is our core efficiency ratio. It had marked improvement, moving from 51.4% in the third quarter of 2009, down to 47.2% in September. It was 47.59% in June.

As I said last quarter, this is good, steady and unexpected improvement that we will work hard to keep going. The actual all inclusive number ended at 52.14%. Still a good number with all the costs and adjustments, due to the acquisitions. And when you look at the year-to-date numbers as of the 9/30 quarter, as compared to 9/30/09, the efficiency ratio improved from 58.6% to 47.8%, and core efficiency improved from 55.5% to 48.5%. Now how does this happen in one year? Well, when you combine the effect of the strong results in our margin, non-interest income, and non-interest expense, as I just discussed, it really is an amazing story for us in improvement. And actually, when you consider that much improvement in a one year time period, and I've said this before, it's kind of embarrassing that it was ever that high. And we are going to work hard to make sure it never gets that high again.

ROA was 1.15% on a quarter-over-quarter basis from 1.12%. Cash ROA was 1.22% on a quarter-over-quarter, from 1.19%. With the new acquisitions, deposits were up $784 million on a quarter-over-quarter basis, ending at $2.56 billion. On a linked quarter basis they were up $377 million, going from $2.19 billion, to $2.56 billion. These totals do not include our most recent Wakulla Bank acquisition. Our total common equity increased $51 million on a quarter-over-quarter, and $9 million on a linked quarter, to $449 million, resulting in continued strong capital ratios. We continue to be positioned with excess capital for additional acquisitions. Book value per common share was $15.79 as of September 30th, compared to $14.71 at December 31st. Quickly, let's switch to loans and asset quality. Loans not covered by loss share were $1.96 billion at quarter end, compared to $1.95 billion at December 31, 2009.

The loan to deposit ratio ended at 92%. Our nonperforming, non-covered loans were $41.6 million for the quarter, of which $29.3 million were located in Florida, or 70%. Non-performing non-covered loans, as a percent of total non-covered loans, that's a mouthful, in other words, our non-performing loans, to loans, throwing out all the acquisitions, and covered loans, showed a moderate increase moving from 1.94% to 2.13%. However, as a whole, non-covered, non-performing assets remained under 2%, ending at 1.95%, as compared to the last quarter at 1.83%. As compared to December, 2009, we have showed improvement again, the ratio being 1.95%, as compared to 2.12%. Our loan loss reserve remained very strong in a record level just shy of $44 million. As a percentage of non-covered loans, it ended at 2.24% with net charge-offs at $2.8 million, down $150,000 from last quarter.

Now, we've said this over and over the last few quarters, and it is kind of our theme. We continue to work hard with the ebb and flow of loans, through the process, and the legal system, particularly in the Keys. We continue to be encouraged with our asset quality, yet it is a slow process. And we have yet to be convinced, with some of our customers weakened by the economy and other circumstances, that they have turned the corner. While we continue to try to be patient, we will maintain our posture and history. If we so determine at some point, that there is a customer with exposure that cannot be corrected in a reasonable time period, we will take the appropriate charge-off, and begin the process of recovery. Our reserves are strong and our capital, earnings and one-time gains, have placed us in a unique position of strength among peers.

Our covered assets have been marked to fair market value, and at this point we are optimistic that cash flows could be better than original projections, but only time will tell. Loans covered by FDIC loss share are now $408 million, which is 17.2% of our total. And that number does not include the recent Wakulla Bank acquisition. And as we mentioned, that portfolio comes to us without non-performing assets. What has occurred over the last six months, is incredible growth for our corporation, and a strong footprint of community banking in Florida, especially in the Panhandle. These banks have core customers with core accounts, and have no problem with our culture and style of operations. In September of 2009, we raised capital to grow our community oriented banking franchise through FDIC assisted transactions. And we have done exactly what we said we would do.

We like the results and the progress we are making. Even with five acquired institutions, we are still in a unique position with our strong capital, and continue to be poised for opportunities that await us as we continue our quest for additional acquisitions. However, with our footprint somewhat established, our goal is now to acquire transactions that adds franchise value, or that are contiguous to our existing locations. That's a little bit change in our focus. I'm sorry I took so long, but I thought everyone would be interested in some of the acquisitions and what's going on there. As you can see, we all are excited, and it's just a great time for Home BancShares, especially with the addition of three new banking partners this quarter. And, we continue to break financial records. I'll now turn it over to our CFO, Randy Mayor, and he can give us a little more color on the financial results of the quarter. Randy?

As Randy mentioned, maintaining asset yields, and improving the liability yields and mix,helped to contribute to an improvement in the margin. The margin improved 5 basis points for the quarter, from 430 to 435, loan yields improved 5 basis points to 615. And the overall yield on interest bearing assets, remained stable at 558. Interest bearing deposit yields declined 7 basis points to 119, while the overall yield on interest bearing liabilities declined 12 basis points, to 145. We also saw average FHLB borrowings decline approximately $32 million for the quarter, with the average yield remaining constant around 3.45%. As you can tell, margin continues to be a major focus point of the Company. Randy.

Thank you, Randy. Randy Mayor may be our busiest person. He was trying to get his hands around all the accounting entries for these transactions, and setting up the loss share. It is a process, and it will make your head spin. We'll now turn to more detail on loans, asset quality, and maybe a short update on lending in our acquired institutions, from Kevin Hester, our Chief Lender. Kevin?

Thank you, Randy. Loans not covered by loss share, declined by $10 million in the third quarter. Over $8 million of this decrease was in Florida, and was primarily made up of four real estate loans, where the property was either sold or refinanced after construction. We continue to evaluate lending opportunities, but quality growth has been difficult in this lending environment. As Randy indicated, we continue to be encouraged by the results of our efforts related to asset quality. We are fortunate that our Arkansas operations are centered in an area, whose economy is considered one of the strongest 20 metropolitan areas in the country. We are also encouraged by the fact, that we are quickly approaching the high season in the Keys, and we look forward to the activity this brings. We are continuing to work with our troubled borrowers, to survive in this difficult economic environment, though we often do this through reducing interest rates, and/or extending amortizations.

We are encouraged to report that TDRs were flat in this quarter, and totaled $80 million, with 90% of these performing to the terms of the restructure. Non-covered other real estate owned, increased slightly in the third quarter, to $12.7 million, of which 57% is located in Florida. As Randy mentioned, we continue to work through the legal process in Florida, and we will move properties to OREO, as quickly as the process will allow. We anticipate another active selling period, as we approach high season in the Keys. As previously mentioned, the nonperforming non-covered loans percentage increased from 1.94%, to 2.13%. Likewise, the non-performing and non-covered asset percentage, increased from 1.83% to 1.95%. This is due to an increase in non-accrual loans of $3.4 million, consisting primarily of three Florida credits.

One of these has been renewed and brought current since month end, and another is a potential short sale, where we expect to collect the remaining shortfall. Early stage delinquencies increased $20 million over 6/30, and are primarily due to two large Arkansas credits, that were just over 30 days past due, at quarter end. One of these credits has been brought current since 9/30, and we anticipate the funds to bring the other current within the next few days. As for lending in the acquired institutions, our acquisition team blends the existing staff with our experienced lending management, and the result is a new lending process that quickly addresses the problem assets, and begins to build a new credit culture in the organization. We are immediately seeing benefits here, as we have motivated officers out, calling on businesses again, in markets where lending has all but stopped. We are very pleased with the quality of personnel that we have experienced in our acquisitions. Randy, that's all I have for you today.

Thank you, Kevin. And I just might add that Kevin and his team is doing an outstanding job getting into these acquisitions, implementing the process, and moving forward with the cleanup of the loans. But I would say, he probably was the most happiest guy, when he found out that Wakulla came without any nonperforming assets. Johnny, that's our report. What did we leave out?

Well, thanks, Randy, and Randy and Kevin. It's a good report. When you said Randy Mayor was the busiest, depends on which day. It could be Tracy French, or could be Kevin Hester. And those three guys are doing monstrous work jobs, and I'm very proud of all of them. I would also like to thank our Vice Chairman, Bunny Adcock. Since I've been on the disabled list, Bunny's filled in for me, while I have been recovering from knee surgery, so I appreciate Bunny stepping in. He's been with the group every step of the way, and keeping me informed while I was recuperating, so I appreciate that, Bunny, very much. I think that kind of completes our prepared remarks today. And Andrea, we would be ready for Q&A if you happen to be around.

Our first question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Hi, good morning, guys, or afternoon, guys, sorry.

Hi, Jon, welcome.

Thank you. Couple questions for you. Maybe to Randy Mayor, the loan yield looks good for the quarter, up 5 basis points. Can you talk about really the key driver for that? Is that, does that have anything to do with the acquisitions, or is it something where you're getting better yields on new organic production in some of the renewals. Just cover that a little bit for me.

I think that some of that's going to be attributed to when you do the discount, when you take the marks on the loan from the acquisition, so they did come in with a little bit better yield there. So it's really been kind of a combination of maintaining what we've got on legacy, and a little bit improvement there when you mark those down.

,Jon, this is Brian. As you know, when you book these loans you have the accretable and the non-accretable yield. And because of the discounts that are on these loans, most of the bucket that is sitting out there for the accretable yield, we've not had to dip into, as I'll call it, to bring the yields up to the projected yields on the valuations that were done by the third parties. So that's a positive too.

Okay. Is the message on the organic production still around that 6% level, and are you able to really maintain that?

Yes, the message is still the same there. It's difficult -- the message internally is still the same. It's difficult in this environment, as it gets further and further along in this economy, we're seeing more and more banks dip below that. So from a competitive standpoint, we are struggling with that. But you've seen the results of what we've done. It's been very positive. So overall, we're still right there.

This is Johnny. We're holding to it. The gnashing of teeth and the screaming is getting louder, but we're holding to it.

It's clearly a trade off, right, it's volume for rate, but I understand it. Just another thing, maybe can we if we go back to the Orlando acquisition, that has had some time to season, recognize it's not huge but can you fill us in on how that's doing, and then maybe Randy Sims, to your question earlier, or to your statements earlier about the process of integrating the new franchise, are you at the point where you have the culture in place to start lending in that market?

We are. I'll let Kevin talk about the culture, and start lending, but as far as the profitability, it is right on target, and even better. We came out better in the premises and the fixed assets. Our savings were much better there. Our savings on personnel were better than expected. And on the other expenses, of course, they automatically dropped, because all the legal bills and expenses pertaining to the covered loans are shared at 80/20. And so the FDIC's picking up most of that.

So we are well ahead of the game, and our original projections, as far as looking at non-interest expenses, and as well as the fixed cost. And so we're trying to implement a little progressive, get back out, try to get some business, introduce ourselves to the community, get our branch managers and business development officers out calling, and really turning that thing,and taking it towards the direction of a community bank. Because when you look at Orlando, it's so big, we're in different communities within Orlando, like Winter Park, Longwood, and Claremont. So you can almost attack each one of those as a separate community, and that's what we're trying to do. We've got some campaigns coming down the road, so you're going to see a bigger presence of us, and we're excited about that market. I mean, my goodness, Orlando's bigger than the state of Arkansas. Kevin, you want to talk about the lending culture?

Yes, specifically related to Orlando, we in the last couple of weeks, we've actually looked at a couple of new deals in our loan committee there. We do feel like we're at a point from a culture standpoint, that we're ready for them to start going out looking for opportunities. And there are going to be opportunities there, specifically in Orlando, that we feel like are going to be worth looking at.

One other comment, Jon, until we get the data switched to our system, and get all of the expense savings, we'll be able to tell you the fourth quarter, how we're tracking based on our projection on the savings. We believe we're ahead. I think we forecasted over to the 30% savings, and we believe we're ahead of that, or will be, and our run rate will be quite a bit higher. That will help us in bidding in the future. Takes about six months.

Just one last question, a small one. What was the, you may have covered it, and I might have missed it, but what was the OREO sale? Can you give a little bit more of the detail on that?

There have been some small ones, not -- .

The big one. He's talking about the loss.

I'm talking about the loss, what drove that?

That was actually a, should have been a second quarter item. It had to do with the receivable from the FDIC. It really was not a third quarter item, and we didn't catch it until l deep into the quarter. So, it was really a second quarter item that had to do with a loss share. We recognized too much income, and we took it in the third quarter, Jon.

Okay. All right. Thank you.

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

Afternoon, everybody.

Hi, Kevin.

Great quarter. And I wanted to, I guess, follow up if you can, get some additional color on the comment, specifically I think we were told that this is a new development that we're looking in contiguous markets to our existing footprint. Can you give a little additional color to that. Does that mean in the suburb right next door ,or does that mean that perhaps there is actually some new markets that we're considering here, that we hadn't looked at before?

No, I think it's very similar to what you just saw. Here we were from Panama City Beach, to Carrabelle, and bang, here comes Wakulla, which takes it from Crawfordville to Tallahassee, and now we're Panama City Beach to Tallahassee. Would we like to increase that Panhandle? Would we like to increase where we are on the west coast? Absolutely. Would we like to shore up and even have more assets in the Orlando area? You bet. But, and we would even like to go from Panama City Beach, back, if something presented itself. So that's kind of what we're looking at, as far as what's coming down the pipeline in these assisted transactions, instead of like, going over to the east coast, where we have nothing. So I guess that's what I was trying to say. Johnny, you may want to add to that.

That's true. We would like to run, I mean, we would like to have that run the full gamut from Panama City, I mean, from Pensacola to Tallahassee. It would have to be a real opportunity, not to say we wouldn't look at a real opportunity, but it would have to be a real opportunity for us, to move out of our Orlando, west coast area, Keys area, and now the Panhandle area. We might -- what is that I-10 on down the interstate there out of Tallahassee, Marianna, Crestview, and in that area we'd be looking in those areas, try to build that Panhandle franchise right now. If something comes up in Orlando, we certainly would be aggressive in that area too.

Okay. I guess to add or to ask another question there, would you be interested in looking at banks? We haven't talked about other states, but would you be interested in looking at banks in, say, Alabama, or even Arkansas. But Alabama, that might have a Florida presence if it would be close to yours. So it is technically not a Florida bank, but it has Florida presence, and then gets you into Alabama?

I think Randy described it pretty good. If it tags on one way or the other to our deal, probably. Of course we would be interested in anything in Arkansas. If there's something that comes up in Arkansas that makes sense for us, we'll certainly be a player in it. Randy, I think that covers it. We just add on, we like to add on to what we have. If we had something that added on into Alabama, that tagged on to our franchise, our main focus right now is kind of Pensacola and Tallahassee.

Got you. Any update on stuff going on in Arkansas, with respects to how banks are faring over there.

There is not much, but the activity in Florida is still there.

Okay, thanks. Good quarter.

Thank you.

Our next question is from David Bishop of Stifel Nicolaus. Please go ahead.

Hi, good afternoon, gentlemen.

Hi, David.

Question for you, in light of some of the national press there, in terms of the moratoriums out there, we're seeing foreclosures as it pertains to Florida. You seeing any sort of sobering effect, or any effect near-term here on the housing markets as of yet? Maybe an update on what you expect in the Keys this season.

On the first part of your question, no, I've not seen any evidence, or additional strain from that standpoint. The Keys, we're looking forward to the high season coming back November, December, all the way through May. We're looking forward to that activity coming back to the Keys.

We don't have a lot of residential in the Keys, do we, Kevin? A lot of hangover out there. We don't have much there.

No, we went through a lot of that last year, single family hit hard last year. Now it's a little more on the commercial side. People that have had the additional cash flow to be able to weather the storm. But they're reaching the end of their ability to continue as well.

Got you, and that's sort of a housekeeping item. In terms of the merger and acquisition expenses, the $1.6 million or so, should we view those as pure sort of quasi one-time due diligence type expenses that are sort of nonrecurring, or are those more distributed across the core franchise?

They're pretty much one time. Of course we're going to miss a few of them that come straggling in, the next couple quarters, but we've been pretty good to catch most of them up front.

Got you, great. Thank you.

Our next question is from Andy Stapp of B Riley & Company.

Hi, guys. Nice quarter.

Thanks, Andy.

What is your comfort level with regard to the extent that you're willing to bulk up your balance sheet through FDIC deals? How much more in assets are you willing to take on?

Well, that's a good question, and that's a discussion around our Board table right now. We're kind of taking them one at a time. There will be a limit. We're going to err on the side of lots of capital, and lots of reserves anyway. So that's a discussion that's going around. I don't think it would hurt us to take on another $1 billion, $1.5 billion worth of assets. But that is truly is a discussion that's going on. That's one reason we're going to go a little more strategic, Andy, than what we've been in the past.

Yes, okay.

And utilize our capital the way we need to.

One number for reference, Andy, if we put on that $1 billion that he throws out there, our TP ratio would still be 8%.

Okay, yes. And could you talk about the opportunities for additional net interest margin expansion? Is it sort of deal dependent, getting in some more deals, and with the discount rates being higher than what your loan yields are?

This is Randy. Right now, I would say that probably the more opportunities is deploying what we've got in cash. On the last transaction, again, we picked up about $80 million in cash on the transaction. So I've got north of $150 million sitting in -- earning a whopping 20 basis points. So deploying some of that, we do have some more federal FHLB borrowings coming due within the next six to eight months, at decent rates coming off. So it's pretty much the same strategy.

We're holding the best we can on the loan side, continuing to monitor all the deposits. We watch that closely, and there will be some opportunity on some of the acquisitions. We didn't break all the rates, only Orlando is where we broke the rates. The deposit costs were a little higher than what we would have liked, but we feel like we can get there, since they're pretty short duration deposits, so we can get there pretty quickly. So still a little more to squeeze out on the liability side, really from the acquisitions.

And how much in FHLB borrowings do you have?

There's about $45 million coming due within the next 12 months.

Okay. And I know you touched on this in your prepared remarks, but do you have any specific months when you expect to complete the system conversions for your most two recent FDIC deals?

The Bayside transaction will be in December. The coastal transaction will be February. And we're shooting right now for Wakulla in March.

Okay. Thank you.

Thanks, Andy.

Our next question is from Mark Muth of Howe Barnes. Please go ahead.

Good afternoon, guys.

Hi, Mark.

Johnny or Randy, with respect to what we've seen in terms of recent deals in Florida, there for a while there was a concern that pricing was starting to get irrational, and Bayside and Coastal you ended up putting goodwill on the books, instead of recognizing a gain. But then came Wakulla, where you were able to get a modified agreement, and win the bidding. When I think we've all been told that the FDIC tries to do anything but those, whenever possible, so that would imply maybe bidding wasn't very strong on Wakulla. Just wanted to see what your thoughts were on how those two played out, maybe you in retrospect overpaid for Bayside and Coastal, or just your thoughts on where we're seeing down there.

I don't think we overpaid for Bayside and Coastal. I'd love to had an upfront gain on those deals. But that was a real franchise. And by the way, Wakulla was a real franchise too. You look at Crawfordville, they own 69% of that market. That may be the best one yet. It was a huge sea change in opportunity. We decided, based on our capital when we looked at that transaction, we wanted it, because it tacked on to those existing franchise and took us into Tallahassee.

But, we decided that it needed to be a good transaction for us, or we weren't going to play, because I think the FDIC was leading us all with our heads sticking out, to chop them off, because we went with -- from 80/20 and 95/5, to 80/20 or whatever you want to pick them on a two tier deal. And then suddenly we went into three tranches, with a donut hole in the middle. And it just got so confusing, and we as buyers kept chasing that money. We backed off, and it certainly appears that a lot of people have backed off, and decided they have to be really good transactions, or they're not going to play. Randy Sims, you got -- ?

No, the only thing I would add is, we went into Coastal and Bayside, and we really liked that market, and then bang, here comes Wakulla, which really put us in a position to do something special in that particular deal. And yes, I don't think there were a lot of bidders. We may have been the only one. Probably was the only one. I don't know. But because of Coastal and Bayside, then it made perfect sense for Wakulla, and when you look at that transaction as a whole, all three of them together, you see a very, very good acquisition for us.

Regardless of the little amount that we put on with Coastal and Bayside, look at the gain that we're going to have with Wakulla. So it's -- we couldn't be happier with the whole deal. And that puts us straight again. I can't say it enough, Panama City Beach to Tallahassee. And doesn't that sound great?

And there is more coming in that area, so we think we're really, from a franchise value, really building some real value. Would you disagree with that?

Okay. Thank you, guys. Appreciate it.

Our next question is from Matt Olney of Stephens, Inc. Please go ahead.

Hi, guys, good afternoon. We've heard from some other banks over the last few months, that the market for distressed real estate has improved somewhat, in terms of pricing and number of buyers. Are you guys seeing any improvement from that respect, for some of the problem loans that are legacy, in Florida, for you guys?

Matt, this is Kevin. I think depends on the market that you're in. We had a really good selling season in the Keys, during high season in the spring. I think we're looking forward to the same thing there again. Orlando, we have seen some pickup in the market, even in some of the single family stuff that we've got. There's a couple of the large builders that are nosing around, looking at stuff. Panhandle's probably not come to that yet. So, it really depends on which markets that you're in.

Okay. And also, I was going to ask about the TARP capital. I know we ask about every quarter. There hasn't been a change in thought process for a while, but any update there, and any thoughts on the TARP conversion, to the small business lending program some other banks are talking about? You guys looked at that? Is that something you're interested in?

Matt, this is Randy. That is something that we're kind of keeping our eye on. We understand that the applications and rules and stuff will be posted, probably coming up shortly here. So that's something we'll take a look at, and see if it's something we may want to replace the TARP. Because as you know, you do lose some of the restrictions that are on with the TARP.

Okay, great. Thanks for the update, guys.

Thanks.

Our next question is from Derek Hewett of KBW. Please go ahead.

Good afternoon, gentlemen.

Hi, Derek.

Wanted to ask a question on capital, in maybe a different way. Given that a large, a growing percentage of your assets are now covered under loss share agreements, are you starting to look at maybe other measures to measure your capital adequacy? I think you guys had mentioned an 8% TCE ratio, even if you add another $1 billion, $1.5 billion of assets on to your loan book. Are you looking at it from maybe a Tier 1 common perspective or -- ?

Well, as we've said for years, the difference really, is the goodwill and intangibles, and we've kind of focused on train ride money, which is a real fanciful common equity. We think that is the number, and we stayed pretty close to that number for a long time and we'll continue to do that. So I don't know, we picked up $6 million worth of goodwill in this last deal. We're up to $55 million, $56 million, I think. Brian, is that about right, worth of goodwill on the books? That's probably enough right now. That is probably enough goodwill. So we're going to continue to focus on the TCE, because in these tough times, that's real money. I mean, therein lies the real money. So I think we're not as focused on Tier 1 common as we are tangible common equity.

Okay, great. Thank you.

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

Hi, guys.

Hi, Brian.

The one question was answered on TARP, but the other question, Johnny, was just, and you kind of alluded to it at the start, was on the expenses, just kind of what -- you would probably be able to cut a few of these costs out of the recent transactions. But just as you guys look at more deals, can you talk about kind of, I guess, taking some of those expenses out? What you also might have to add as far as infrastructure goes, just to acommodate the growth you put on, and will continue to put on.

Well, I'll let some of the other guys talk about that, but from -- it's an accounting nightmare. And from the accounting side, there's lots, we're working our people awfully hard, and there will probably be some expense increase on the accounting side. Kevin Hester's team is -- we've really utilized his team well, and we're picking up some good talent in some of these acquisitions, that are working well for us. So we're trying to pick out the best of the best of the group. But from other than that, once we get -- guys help me. We're actually seeing -- we are not seeing a lot of pickup in expense except, I think the accounting side, Randy, would probably be the biggest. Kevin, you agree with that and Brian.

I agree.

I agree.

That's it, so we've really got the infrastructure. We really haven't beefed up our data center. We got the talent and the people in our data center to swallow this. It's just the accounting side, because it's a damn nightmare.

And I think after we rest, and the noise is taken out of the transactions, you're going to see some of the savings from these transactions starting to hit, and coming into play. But right now, if we continue to get new acquisitions, you're seeing some costs up front that are just natural -- a natural part of taking them on.

I want to see what we're actually -- when we get one streamlined, which we're real close on Orlando and Key West, I want to see how we compare to the model that we bought it on. Did we -- we're forecasting 30%, 30% to 35% savings on these deals. Are we 50% or 60%, and I certainly hope that we are, and I think that we are. I think we're moving in that direction. I think the deals -- as we have experienced, and I experienced in my prior deals, these deals are better than you anticipate, and thus far they have been.

This is Randy. It does take some time. For example, we can't get off of their DP system for a matter of five to six months, to manage the conversion. Tracy's been renegotiating, working on leases and things like that, and those don't kick in. So it really, you don't get close to get down, to what I would call a normalized run level, for six to eight months after you do the transaction. And that's kind of where Johnny's talking about, we're getting close on the first two, and should be able to give a decent measure on that.

And that will be a good guide for us in the future, as we go, because you kind of look at it, and you think about it, and you study it for your bid. And you're really conservative, as we are, as Kevin is on the marks. We've been very conservative on these transactions we think, thus far. That's why they're performing better than we thought they would.

Okay. That's helpful. And just the pickup in fee income this quarter from the accretion, I guess, as far as kind of a regular and recurring stream of revenue. I mean, I guess is -- what's the best way to think about that number as you go forward? Is this quarter a pretty good number to work with, to -- outside of the recent transaction?

Brian, this is Brian. No, it's not. We've had to learn a large learning curve on how this identification, asset and accretion goes. What you'll find in this quarter, is that we visit with our accountants, and they thought we needed to be a little more aggressive on how we accreted the discount back on the identification. So our year-to-date number's where it needs to be. But in the third quarter, there's $461,000, that basically catches up the old Southern transaction. And so that $461,000 should have been mostly in the second quarter. The Coastal and Bayside transactions also increased that number, and that was $310,000. But instead of that being for a full quarter, that's for two months.

So, when you get down to it, we do have $461,000 that probably is a little overstated for this quarter. And then you're going to have to increase the Coastal and Bayside by about another $100,000. And then when you get down to the fourth quarter, you're going to have Wakulla come on, so it will grow some more there too.

A lot of noise for a while.

Actually, the second quarter we didn't believe the numbers were that good, so we weren't sure they turned out as the accountants forced us to do. They were better than we anticipated, booked that $400,000 in the third.

John is exactly correct. Randy and I went against this, surely this can't be right, and so we took a more conservative approach on the second quarter. The accountant convinced us we need to be a little more aggressive. I will tell you this, it's loaded on the front end, meaning that when you look at the curve, this is not a straight line deal over the next five years, or the next 10 years. A large percentage of it comes in, in year one, and two, and you make approach for some of these transactions, as much as 50% of that accretion coming in year one.

It's all based on what the estimated workout time is for these problem assets. And as we're finding, it's different each institution. Some are the whole foreclosure process is stopped, and we have to get the wheels cranking again, and some have kept on. So it's kind of a difficult assumption right now.

Okay. So just so I understand it, Brian, the 461 was overstated this quarter for the recent transaction, but the Bayside and Coastal, what has to be adjusted from this quarter to get that?

Well, we recorded $310,000 of accretion income for Coastal Bayside, but just remember, that's for two months, not three months.

Okay. And that was in the third quarter here.

Yes, properly in the third quarter. I will just remind you that it wasn't in for a full quarter.

Okay, I got you. I appreciate it. Okay, thanks very much.

Thanks.

Our next question is from Andy Stapp of B Riley & Company.

Yes, pardon me if I missed this, but would you provide some color on what you're seeing in terms of loan demand, and the loan pipeline?

Andy, I mean, it's still a tough market. The economy's difficult. There's not a lot of great opportunities out there. I think we're probably going to see out of our Orlando market. I think we're probably going to see more opportunities there than we are in some of our other markets in the next few months.

Okay.

The only thing I would add to that, is it's a two-sided street. We've got people here in our local markets, that would like to build, have 14 spec houses. Well, we're only doing two or three. Then on the other side, you've got other businesses that aren't sure what's coming down the pipeline, so they're holding back. So, not only have you got conservative bankers on one side, you've got conservative businessmen on the other side. And so the economy just needs to get some confidence, so that both sides move forward with the confidence, and I think that's when you're going to see these loan pipelines start filling back up.

Yes, okay. Thank you.

Thank you.

Gentlemen, it looks like we have no further questions at this time. I would like to turn the call back over to Mr. Allison for any closing remarks.

Thank you, Andrea. I guess that kind of sums up. Good questions. Thanks for your attendance today, and we'll talk to you in about 90 days. Randy Sims, do you got anything?

No, sir.

By the way, Randy was a new grandfather in the middle of this conference call.

I did get a picture, and showed everyone.

So he showed us a picture, so you all can send money and flowers and gifts to -- just send them to my office and I'll get them over to you. Thanks a lot. Talk to you in 90 days. Bye.

Thank you for joining us. The conference is now ended. You may disconnect.