Home BancShares Inc (HOMB) 2011 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated first quarter 2011 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 3 of their form 10-K filed with the SEC in March 2011. At this time, participants are in a listen-only mode and this conference is being recorded. (Operator Instructions) It is now my pleasure to turn the call over to our first presenter, Mr Allison.

Thank you, Valerie. And welcome to the first quarter earnings release 2011 for -- and conference call for Home BancShares. With me today is the usual suspects, Randy Sims, and Randy Mayor, Brian Davis and Kevin Hester and they'll all be participating today when we go to Q&A.

In spite of the noise that we had in the fourth quarter, we also said that the quarter was the best quarter on operational basis that the Company has ever had, with core income of almost $20 million. Well, the quarter -- the first quarter is a continuation of that ramp-up with strong earnings and core income of over $20 million. We're very pleased with the core income ramp-up and hope it continues to build over the rest of the year.

I'm just going to kind of hit the high points today. This is really a fun report to do. We really have nothing negative in the report. It's all positive. And I'm just going to hit the high spots and then I'll turn it over to Randy Sims and his team to get more specific on the numbers.

We had a record margin, and as you know how conservative our accounting is, that is a real margin, that's not a phantom margin. We reported the covered loans at a 6.90%, is that correct, guys -- a 6.90% where the rest of our portfolio was yielding a 6.59%. With about $600 million worth of covered loans, whatever percentage point that we mark those loans up, that's about $6 million worth of revenue. The conservative nature some people are marking 8%, 9%, 10%, but we left them in the 6%s.

We had record revenue of over -- nearly $43 million, record net interest income with strong non-interest income, I don't know if it was a record, but it was awfully good and the efficiency ratio 50 and change. We had lower non-interest expense and we expect that over the rest of the year to continue to come down as a result of some of the lesser expenses in the new acquired FDIC-assisted deals. We had record income, both on an operating and EPS basis, and there was no one time gains in this. This is pure, as I call it, train riding money. We didn't have any one time gains, we didn't do a failed bank during this quarter and recognize a large gain.

We beat expectations by $0.08. And we had a 76.4% increase in first quarter 2010 income -- excuse me, 76.4% increase first quarter 2011 over 2010 on an operating basis. If you remember, last year we had about $5 million or $6 million worth of gains in the first quarter from bargain purchase gains on Orlando and Key West. We had none of those in this quarter and earned almost the identical amount of money. We had a return on assets of 1.40 and a cash ROA of 1.47. We paid off $27 million in federal home loan borrowings during the quarter and liquidated about $100 million of internet deposits that we had that were higher price deposits. Non-interest deposits grew by $55 million, that's a pretty good plus and earnings exceeded $12.7 million.

Another bright spot on the horizon was asset quality. Marked improvement on asset quality. I think it was better than I expected. I really expected to remain fairly flat the first quarter and improve substantially the second quarter. But we had non-performing loans that were down substantially, non-performing assets were down. Charge-offs were down and reserves to a record level. Reserve coverage to non-performing grew from 107% to 159.82%, almost 160%. That's pretty good improvement from where we were at the quarter to where we are today.

Arkansas economy remains strong. We're pretty pleased with what is going on in Arkansas. If you remember, I told you last year, it wasn't an Arkansas asset problem, it was a couple bumps in the road and we've dealt with those. Florida, interestingly enough, met with the largest real estate -- large and most senior real estate guy in Florida recently and he said there were 3,800 pieces of property for sale in Monroe County and 1,000 of them have been sold and he described sales as brisk. It may have been the best hospitality season ever.

Our largest piece of OREO left in Florida is about a $4 million piece. We have a $3 million offer. We priced our OREO about right. When you look at it, we're up 100 or down 100 on the quarter. Have a heads up here, we might take this offer. We're progressing with it and it will probably be about a $1 million loss on OREO and that would be in the second quarter if we decide to take it.

We were really -- talk about TARP for a minute. We're paying about $625,000 a quarter in dividends. We're really kind of tired of paying that every quarter. We had applied for the small business lending program that was as of March 31, you had to have your application in by March 31 and I don't guess anybody applied so they've extended that, I think Randy Mayor told me, to May 16. We still don't own that.

And as a result of that, and the fact that some of the people in Washington are kind of playing games with that and trying to change the law, we may move on TARP earlier than we had anticipated. We're going to look at it and analyze it. We already have been doing that. So, we may move a little earlier than we planned on.

Loan loss, I told you that we thought there would be a recovery on the large charge-off, Arkansas charge-off at the end of the year. We don't have the money yet. But we think that we have agreed in principal for a sizable cover and we hope to be able to announce it today. It doesn't look like we're going to be able to do that yet. We don't have it in our hand. This has been a pretty good legal battle and there is not a lot of trust between us, so we'll announce it to you when we get it in our hand. It could be substantial going to loan loss reserve.

I'm pretty happy guy today. That kind of concludes my remarks. And we'll go to Randy Sims for the specific numbers. Randy?

Thank you, Mr Chairman. Johnny pretty well covered a lot of stuff and as he indicated, we have started 2011 with the best quarter in operating results in the history of Home BancShares. And before I start, I would like to congratulate all our employees that work so hard to make a difference and improve our banking organization. They did a great job this first quarter.

Our focus has really been in three areas for the quarter. The first was profitability and the control of our expenses, protection of our margin, and improvement in our non-interest income. The second was efficiency with the task of converting our acquisitions and closing duplicate branches. Third, and most important, was asset quality. We really wanted to see improvement in our non-performing totals and ratios and without doubt the ending numbers were very good in all three areas. And in addition to this focus, we have continued throughout the first quarter to be very active in the pursuit of FDIC acquisitions.

So, let's look at a few numbers on profitability. We finished the quarter with earnings of $12.7 million, or $0.42 diluted earnings per common share. In comparison to the same period of 2010, our net income was $7.2 million, after deducting the gain Johnny talked about we received from our first quarter FDIC acquisitions of those two failed institutions in Key West and Orlando. From an operating net income comparison, we increased our income by $5.5 million, or 76.4%. This represents not only record earnings, but record growth in operating earnings. The best we have seen in the history of Home BancShares. Cash diluted earnings per share ended at $0.44.

Return on the assets -- return on assets for the quarter was at 1.40%, with our cash ROA at 1.47%. Again, record improvement in the numbers as we continue towards our goal of an ROA of 1.50%. And we are optimistic with the potential of our Florida markets. At the bank level and on an operating basis before tax, 45% of all of our assets are now in Florida. But their contribution to income is significantly less. So, as we continue to clean up our acquisitions and consolidate, we believe there is tremendous income potential for Florida.

The most important component of our net income, of course, is our net interest income and margin. Another all-time record was set for the Company with an increase of 38.7% to $34.5 million, compared to $24.9 million for the first quarter of 2010. That interest margin on a fully taxable basis was 4.61%, compared to 4.26% in the first quarter of 2010. Great improvement. We continue to improve pricing on both sides of the balance sheet with improvement each month during the entire quarter. These are very encouraging results.

Non-interest income also reached record levels and showed marked improvement ending at approximately $10 million. Again, adjusting for the gains from acquisitions in the first quarter of 2010, Home BancShares increased non-interest income by $2.7 million or 37.3% in a quarter-over-quarter comparison. I will now turn it over to our CFO, Randy Mayor, to give us a little more color on our income margin and other financial highlights. Randy, what made the difference in the first quarter?

Well let's start with the net interest income which was up $1.15 million Q4 to Q1. There was some mix changes within the balance sheet as well as Q4 items that were not repeated in Q1 that contributed to the increase. Looking at average balances on the asset side, due from and fed funds sold balances declined $72 million. Investments increased $44 million, while loans declined $86 million. On the liability side, timed deposits declined $73 million. Mostly internet CDs that we have allowed to run off in the FDIC acquisitions, while interest bearing checking and savings increased $29 million, federal home loan bank funds declined $21 million and non-interest bearing deposits increased $17 million.

In Q4, if you recall, we had a significant amount of non-accrual interest associated with the charge-offs, as well as some investment interest adjustments due to the fraudulent bond issues. In Q1 the loan yield and investment yields have returned to normal, with loans increasing 32 basis points to 650 and investments increasing 47 basis points to 381. Overall, the interest earning asset yield increased 39 basis points, while the interest earning liabilities declined 5 basis points resulting in the 4.61% margin for the quarter.

Core non-interest income was relatively stable with the exception of mortgage lending income, which was down $644,000 for the quarter, contributing to overall core non-interest income declining by $400,000. Core non-interest expense was also relatively stable, declining $117,000 from Q4 to Q1. We were able to complete the conversions of our last two acquisitions in March. Actually, we were able to complete all six acquisition conversions within 364 days of the first acquisition, which is something we're really proud of. With the conversions completed, we expect to see continued improvement in non-interest expenses in Q2. Randy, that's a quick summary of the income and expenses for the quarter.

Thanks, Randy. Good report. As I said, efficiency was also a focus for us this quarter. Non-interest expense for the first quarter of 2011 was $23.9 million, compared to $18.6 million for the first quarter of 2010. Keep in mind also, we increased the asset size of our Company by 20% in that same time period. We ended the quarter with a core efficiency ratio of just over 50%, as Johnny told you in his opening remarks. While our goal is to maintain a ratio in the mid 40 percentile, we were very pleased with this result for the quarter, given the overhead that we maintained with our new acquisitions in Florida.

Our project training and conversion teams have been very busy this quarter, as Randy indicated in his remarks. All conversions are now completed. In addition, seven Florida branches were closed as part of the conversion in which we had nearby facilities to service our customers. We anticipate improvement in our efficiency ratio in the second quarter.

Deposits remain basically the same at $2.92 billion at quarter end, compared to $2.96 billion at December 31. Loans ended the quarter at $2.4 billion, with covered loans now at 23.4% of the total. Stockholders equity was $498.3 million at quarter end, compared to $476.9 million at December 31, 2010, an increase of $11.4 million resulting in continued strong capital ratios. We continue to be positioned with excess capital as we look down the road for additional acquisitions. Value per common share was $15.41 at March 31, compared to the previous quarter of $15.02.

As I mentioned, our third focus for the -- I'm sorry our third focus for the quarter was asset quality. Our management and employees have worked extremely hard to improve our numbers. This is what we really wanted to see and we were very successful. I cannot remember a quarter in our history where we had so much improvement in the asset quality numbers.

Now here is just some of the legacy, the non-covered numbers in ratios. Past due loans, 12-31, 3.65%, 3-31, 2.73%. Non-performing loans 12-31, $49.502 million, 3-31, $33.533 million. Non-performing loans to total loans 12-31, 2.62%, 3-31, 1.81%. Non-performing assets, 12-31, $61.205 million, 3-31, $51.425 million. Non-performing assets to total assets, 12-31, 2.08%, 3-31, 1.78%. We are really glad to be back under that 2% and want to stay there. Allowance for loan losses to non-performing loans, in other words the coverage of our non-performing loans, 12-31, 107.77%, 3-31, 159.82%. Great improvement in very important asset quality ratios and totals.

And like our legacy loans, we continue to place emphasis on the work-out of our covered loans and we've seen improvement in each of these portfolios. However, how was all of this accomplished? What made the difference and what kind of progress are we making in the covered portfolios? I will now turn it over to our Chief Lending Officer, Kevin Hester, to discuss these questions and more. Kevin?

Thanks, Randy. As the numbers indicate, there was a significant improvement in the asset quality metrics of the legacy portfolio during the first quarter. I would like to thank our lending team for the effort involved in this accomplishment.

We are reaching the end of the high season in the Keys and all indications are that it will be the best season in recent history. As a result, we have several Keys credits that have performed in a manner that we were able to return them to an accruing basis in the first quarter. And this reduced our non-performing asset and loan totals.

In addition, through the completion of the legal process, we moved two Arkansas relationships to OREO that resulted in improvement in non-performing loans. In total we reduced non-covered, non-performing loans by 33% and non-covered, non-performing assets by 16% in the first quarter. The decrease in non-performing loans also led to the improvement in the reserve coverage to 160%, as Randy mentioned. Non-covered other real estate owned increased by $6.3 million, to $17.9 million due to the natural progression of the previously mentioned credits that were in the legal process.

The mix has changed somewhat with 60% of legacy OREO now located in Arkansas. This change may continue with an anticipated closing during the second quarter on the largest parcel of Florida property that would cut their current balance in half. An improvement in early stage delinquencies was noted on both a linked quarter and a quarter-over-quarter basis. We are encouraged by this continuing trend.

In our acquired banks as Randy mentioned, we continue to grind through the legal process on the problem assets and are encouraged by the progress we're making in this area. Conversely, we're beginning to see some new credits in these markets as well and are encouraged by the efforts of the new additions to our lending team. Randy, overall it was a very positive quarter on the lending side and we are encouraged by the prospects for the remainder of 2011.

Thank you, Kevin. Great work in those loan totals and ratios. What can I say? It was a wonderful start for the year. Record operating earnings, record margin and record non-interest income. Plus all of our conversions are now completed, it should improve our overall efficiency and produce considerable savings as we head into the second quarter.

In fact we're ready for another acquisition. And add to this -- significant improvement in all areas of asset quality. Again this was the best quarter we feel like in the history of our Company. That pretty much covers everything. I will now turn it back over to our Chairman.

Thank you, Randy. And Randy, and Kevin, Brian, do you have anything to add today?

No, I think it was a good quarter for the Company.

It was a good quarter. We're really pleased. The $0.42, we would have earned about $0.45 if we hadn't had TARP. That equates to about $1.80 a share. I think some of you our goal is to be on a $2 run rate between now and the end of the year to take probably a couple more deals to get that. Takes about a 270 cash -- I mean 270 core ROA to get there and about a 159 ROA -- GAAP ROA to get there. So, all of that is within reach. We hope to be at the $2 run rate by the end of the year. We're actively engaged as we are right now actively engaged in some assisted transactions, whether we will be successful or not, we don't know. But at this point in time, Valerie, I think we're going to open it up for questions. So, we can go to Q&A.

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Jon Arfstrom of RBC Capital Markets.

I agree, it was a good quarter.

Thank you.

A couple of questions for you guys. Kevin, can you give us an idea of how many credits you cleaned up in the quarter? Just trying to get an understanding of whether or not there were large credits or several smaller credits that moved out so we can understand that?

On the non-accrual side there were probably a total of about eight credits that moved up to the accruing basis. And it looks like a total of about 10 properties that moved -- or 10 different loans that moved to OREO. It's not quite 10 properties, it would be less than that. So, about 20 total.

It sounds like from the commentary from all of you, Randy, John and Kevin, that you're more optimistic on Florida and I guess the one part of your model that isn't quite working yet is overall loan growth. And I'm just curious how you feel about some of the lending opportunities in Florida? I know you've played a lot of defense there over the last few years, but do you feel like there is attractive lending opportunities emerging in Florida?

This is Kevin, I believe there are some. I think there is less -- where we are there is less competition for some of these credits that we're looking at than we've seen in Arkansas, especially on the rate side. So, there are going to be some opportunities we're going to be very conservative and we're going to error on the side of caution and we're going to have a lot of people at the credits that we look at.

Jon, this is Johnny. I'm just back from down there sometime and there are some pretty good opportunities coming about in Florida. They think the recreation season was the best ever. They relate it back to the '05 season and properties are going away. The realtors said a little more pressure on the buy side and it looks like prices are going to move up.

We looked at -- we've looked at probably $20 million in the Keys in the last three weeks, so we haven't improved all of that, but some of them are very good loans. I think there is some real opportunities coming out of the Keys. And we're also going to look at single-family residents because they're in the trough of the lowest time we've seen these. There is really no financing for the jumbo loans and there may be an opportunity there.

Okay. That makes sense. And then just one more question, Randy, for you. Do you have any more room on the funding costs in your view? It's still coming down gradually, but curious if you think we're close to a floor on that?

I think we're getting close to a floor. We've still got a little bit more in the -- I'll call them Internet or quick-rate type CDs that were acquired in the FDIC acquisition. We probably still have about $65 million of that to run off over the next 14 to 16 months. But the yield on those are not just outrageous, they are [1.20%] or so like that. So, a little bit of room there, but not a whole lot.

Okay. Thanks. Nice job, guys.

Thank you.

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

A couple questions for you. Johnny, you're sitting with close to a 3% reserve now, the legacy loans and your non-performers, as you guys mentioned, now pretty comfortably below that 2% of assets. I'm guessing you're not going to need that high reserve if things stay the way they are or continue to get better. Could that happen as soon as this quarter or is that more of a back half of the year event?

I think it's more of a back half of the year event. I think I alluded to a large recovery. If we get that large recovery, based on first quarter, that's several million dollars that will go into reserve. I'm getting an echo. Can you hear me all right?

Yes.

Anyway, we may not have to feed it because of that. We normally like to feed what we charge. And I would say it's the second half of the year for the reserve.

Okay. And then on the margin, understand all of the factors you guys mentioned for why the margin was higher, but being that it's now significantly higher than it was even before everything that happened last quarter, is this margin, Randy, you think sustainable up here around 4.60% or so?

Think it is. I think it's more of a normalized margin. As we said, we had some Q4 things that kind of contributed to the differences here that you are seeing, but things seemed to return pretty much to normal this time.

Okay. And then, Johnny, is your thinking on TARP entirely due to just wanting to get rid of it or also maybe reflect any type of change of thinking on what you guys think you will be able to do on the assisted deal front because you said in the past you were holding TARP partly as sort of a reserve in case you needed it to do a big deal. And also I'm anticipating with your capital being where it is, you are going to try to pay it back without a raise. So, a couple of questions are on top.

That's correct. That's correct. And we're just tired of paying it. It's about $0.10 a share. We're really pushing for -- hope to be the fourth quarter of $2 run rate and that's $0.10 and that's pretty easy money to get and we're sitting on the cash.

And the small business lending program appeared to have some viability to it until recently. We can always go back and apply for that later on. But I think it's probably time and our investors seem to be ready for us to do it and I think we're ready to do it. But that's certainly not going to take us out of the game. Our tangible common equities are up over 10% and tier 1 is up in the 20%s. I don't know how much of an impact that will make on us. Brian, do you got any--?

We were running the preliminary risk based capital ratios and they are obviously fairly well improved from the end of the year. We're looking at about a 50 basis point improvement on our leverage ratio, so it will be a reported 12.7 and if you added $1.13 billion of assets to get us to our target of $5 billion it would take the leverage ratio down to about 9.2 and would give you a TCE of 7.3 and that's with no bargain purchase gain.

So, still optimistic, Johnny, that there are decent sized FDIC opportunities out there for you?

We're in the game right now as we speak. Joe, we'll find out if -- when you run into these blind trusts, we run into some of them recently and nobody will get them because their bids don't add up or don't make sense to us, but we are in the game. We will continue to play.

Looks like we're going to have to play on the smaller deals, $100 million, $200 million, $300 million and when they get to $500 million, $600 million, $700 million or up they get a little squirrelly. With the earnings power the Company is generating, I'm not afraid to step down to a PCE of 7.3 because we can earn it back pretty quick.

And last question, Johnny, when do you think we hit that inflection point where you think the $100 million or $200 million deals are not doing and you start looking at live bank deals again?

I don't -- we're looking at both sides of it right now. We're flying Monday morning to look at some market deals just in areas that may make some sense. But they have to make a lot of sense to us to beat the FDIC deals.

Sounds good. Thanks, guys.

Thank you.

Our next question comes from Michael Rose of Raymond James.

I was wondering if you could clarify some of your comments around pricing firming up in Florida and if there is any differences you're seeing in the different markets in which you operate? That would be helpful, thanks.

I think Johnny was speaking specifically about the Keys.

I was.

The other markets, we're seeing some movement on a little bit on land in Orlando. If it's in the right place, if it has -- if it's improved, and we're getting offers. We're moving property. I think we saw Franklin County, a small county in the panhandle, best sales numbers in two years. The Keys are showing the same things as far as sales.

I think we have all felt the Keys would come out first. I believe that's what we feel still. So, the rest of Florida will be -- we believe will be behind that. But we certainly feel our legacy market is beginning to get better in some areas.

If it's an ocean front lot, you can sell it. If it's commercial property generating some income, you can sell it. If there's a house you can sell it. There is going to be more lots for sale in Florida than the national debt when this thing all settles down. There is going to be lots and lots of lots.

But we're moving property. I'm very pleased. Prices have stabilized around, particularly in the Keys where our legacy portfolio is. And the Miami condos, if you can believe this, are absolutely going away. So, pretty interesting. We thought they had 10 or 15 years worth of inventory on condos and they obviously didn't have that many and they are selling out. So, it's an indicator that Florida is beginning to come back.

Well, if anyone is looking for a Tampa condo, I got one for sale. Thanks, guys.

Well, I didn't say what you paid for it. Some of these prices -- I can tell you what, you go back and look at the tax records of '02 and that's what the stuff is bringing. It's about a lost decade, about 10 years. You can look at those records, that's about where it is.

Thanks a lot, guys.

Thanks.

Our next question comes from Matt Olney of Stephens Inc.

Good afternoon, great quarter.

Thank you.

First question for Randy Mayor, good details on the margin. It sounds like you brought the excess liquidity down quite a bit in first quarter. Is this current level of liquidity, is this where you're comfortable over the next few quarters or could this fluctuate for the rest of 2011?

Well, it's just trying to manage it down a little bit. It -- hopefully we will be able to keep it down where it is at, but if you have a deal, you never know what kind of liquidity. Last time we got a big influx of cash in the deal.

So, we're just trying to not get greedy and go long-term on stuff, but to move a little bit of the money from fed funds and overnight positions into some short-term callables or something to get a little bit better yield. But hopefully we can keep it down there, but it does fluctuate quite a bit and if there is a deal, there is no telling when that will happen.

And then moving over to the credit side, the NPL's have moved down quite a bit, just around $33 million. In the past you've broken out what percent of this is actually performing as agreed upon. Do you guys have that number for the current NPL status?

We do not have -- Kevin, do you have any of that performing?

Matt, we have got about $6 million that is paying and may not have paid long enough so back on accrual and/or it's paying and it has matured and for some reason we cannot renew it. So, there is about $6 million that could cure itself in this year. There is another couple of million that I feel will probably sell and will come out of there during this year. Most of the rest of it, we're working through the legal process and we'll continue to pursue it through that avenue.

Okay. Sounds great. Thanks guys. Great quarter.

Thank you.

Our next question comes from Kevin Reynolds of Wunderlich Securities.

First, I guess I'll start with great quarter. Obviously great quarter. Most of my questions have been answered. I don't know if you mentioned this or not, if you did, I apologize for not keeping up. Target markets for M&A and it has been historically Florida and maybe looking in Arkansas, are you broadening that out now as we get further along in this process and if so, what markets are you interested in and which ones are you not interested in from a failed bank perspective and I guess maybe open bank too?

We just haven't shown any interest in the Georgia market. We have -- we are well organized in Florida with a great team of people. And we really do not -- are not too interested in taking our eye off the ball from what we've got in place, the infrastructure that is in place.

We certainly, as we've always said, we're looking east Texas as we did before when we bought in our former lives when we bought Tyler Longview, and actually it's about a third of our franchise over in east Texas. We've always liked east Texas, but there is not much coming out of Texas and we continue to look in southern Missouri, but our focus has been Florida and it continues to be Florida. It certainly would be Arkansas if there were an opportunity that came up in Arkansas.

Okay. Thanks a lot. Great quarter.

Thanks.

Our next question comes from Dave Bishop of Stifel Nicolaus.

I'll have to circle back with Mike about that condo. I think my mother-in-law might have to.

Well, now if your mother-in-law was needing something we have a few down there.

She's never been to the Keys so you never know. Most of my questions are answered, but in terms of the branch consolidations of seven branches, how much of that was reflected in the operating expense run rate this quarter or is that still to be realized as we push forward here?

That's the second quarter -- that will be a second quarter item, that and substantial reduction in payroll will be a second quarter item. The last three conversions were late in the quarter, so there is not much savings at all, if any, on those. And so we're really looking forward to seeing what we can do in the second quarter on it. That would be pretty substantial.

Okay. And then I didn't know if you mentioned in regards to the TARP repayment, how much is the holding company cash exiting the quarter?

We have about $58 million in cash at the holding company right now.

$58 million.

Which is enough to pay off $50 million worth of TARP.

When -- obviously not pinning you down to a time, it could be as early as late second quarter, third quarter event?

Very possible. I'm really tired of writing them a check. I mean that's a lot of money. That's $2 million. If we head towards our goal of trying to hit a $2 run rate by the end of the year, that's a pretty easy $2.5 million actually, to pick up. Because that would be a little arbitrage because we're drawing 0.25 on that $50 million, so you'll have to understand.

It doesn't make a lot of sense, but we've sat on the money for a while. But I think basically asset quality, things have cleared and I don't plan on raising additional capital. If we ran into a big deal, I'm confident we could get that done and -- or we could earn our way out of it, the way things are going.

Great. Thanks, guys.

Thanks, Dave.

Our next question comes from Derek Hewett of KBW.

Hi, good quarter. Circling back to a previous question, in terms of live bank M&A, what are some of the parameters that you guys are looking at in terms of the threshold for tangible book value dilution or time frame for accretion? And it also sounds like you're willing to take the TCE down to about 7.3%, kind of is that the new floor?

Well, that's a new floor with a $1.3 billion in asset, which gets us to a goal of about $5 billion.

Plus there is no gain in that either.

There is no gain in that. And we'll be earning our way, if we continue to run at this run rate, we're going to be adding $50 million this year.

We added 40 basis points to our TCE just this quarter. Yes, I think you know we like to stay around 8 and that's just saying that we would work our way back up to that.

Okay.

It's not saying that we would go down there and stay, because there is -- like Johnny said, there is lots of earnings power and it would move back up.

I don't know the parameters. Obviously you can look at our balance sheet and we have -- we've done 12 acquisitions, 10 or 12 acquisitions in our history and we've got a total of $59 million worth of goodwill. So, it tells you that we're very protective of our tangible common equity and we'll continue to be -- we'll continue to be protective of that.

I'm not sure what parameters, what parameters I can tell you other than geographic parameters would make sense and we're not going to stack a lot of goodwill on the books, we don't have any intention of doing that, particularly with a bank that's in trouble. I guess the parameters are we want to buy them cheap and get them to make a lot of money and not have any asset quality problems.

Which would then make it accretive to tangible.

Which would then make it accretive to tangible. We've been invited to a lot of opportunities and we're starting to kick some tires for the first time. That's where we are.

Okay, great. Kind of circling back to credits, do you have the balance of the TDR's?

Yes, TDR balance was almost $68 million, so it was very flat from year end.

68.

Okay, great. Thank you very much.

You're welcome.

Our next question comes from Brian Martin of FIG Partners.

Just one question. You gave everything on the credit quality, but what are the classifieds doing on the quarter? I assume they are down. Are they similar amount to what the other numbers experienced?

They went down pretty substantially. I just remember seeing the line, and the line, instead of going up, went straight down almost. I think it dropped like $25 million to $26 million.

That sounds right.

Okay. 25 or 26. Okay, and then you guys talked about the Florida assets being 45%, but the contribution income not being there. Can you just talk about where the contribution of income for Florida is right now and maybe just where you're thoughts are, where that can get to?

Well there is lots of improvement that can happen. What we look at is a pure operating deal with all of the accounting entries and the extra accretion and everything out of there. So, we're just looking at an internal report that shows that bare knuckles comparison between Arkansas and Florida, and it's -- my accountants are over here just dying because I wanted to say that, but at any rate, it's somewhere between 12% and 20%.

Not to press exactly where it is, but that just tells you there is 45% of the assets out there, and they are only getting contributing 50% of the income. We get them up, and they are -- they are all working hard. I, for the first time, we are -- I can see us all rowing in the same direction and it's really encouraging. If we can get them up to some of the same standards and then just constant improvement, then there is a lot of potential for the Corporation. Does that answer your question?

Yes, I mean just timing-wise, how long do you think it takes to get to that? Whatever you view as a normalized level there?

Probably going to take -- it will take a while.

It's probably going to take 3 years to get there. It took us about that long when we bought the Texas banks back in the Texas bank and bust. It took us about three years, they got better just slow improvement over and over, month by month, it just takes a while to get them there. I mean they are paying us a little bit -- the difference between this deal and the Texas deal is they didn't pay us during the time. We get paid a little bit. Call it accretion or whatever it is, but we get paid a little bit along which I actually like this deal better than the ones we did in Texas before.

Okay. And just last question. It was touched on earlier, a question on the expenses. The expenses with the branch closures go down quite a bit this quarter. Just with the full quarter impact. But the balance of the year, are you also -- I guess it sounds like you expect expenses to continue, total expenses to continue to go lower even in the back half of the year, maybe just not as much?

I think they will. Tracy French, who is running the Panhandle, which is the newest bank, will have a continued reduction in expenses throughout the year. They will not be as significant as probably as what we see the second quarter, but they'll be continuing to come down. I was a little disappointed in our expenses for the quarter.

That's my new focus, is looking at those expenses for the rest of the year. I would like to pull those expenses. I think they should come down quite a bit. I mean we have 20% more in assets, but we had 22% more in expenses. I know a bunch of that is coming out, but I'm looking for those expenses to come on down.

Okay. All right. I appreciate it. Thanks, you guys.

Thank you.

Our next question comes from Joe Steven of Stieven Capital.

Johnny, I'm all done. Everybody got everything. But again, good quarter, guys.

Hi, Joe. Thanks. I appreciate it. We are pleased with the quarter and thanks for staying with us.

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

Valerie, thank you. I just want to thank everyone. We want through kind of a tough time in the fourth quarter last year. And we told you what we thought we could do and what we anticipated doing, we did it and you stayed with us. We appreciate your support.

It looks like we're off to a good year. Hopefully we'll pick up a couple of more FDIC deals and improve our efficiency a little bit. And maybe we can be at a $2 run rate by the end of the year. So, I appreciate -- again I appreciate your support and I appreciate you believing in us. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect and have a great day.