Home BancShares Inc (HOMB) 2011 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Incorporated, Second-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 the 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. (Operator Instructions) This conference is being recorded. (Operator Instructions) It is now my pleasure to turn the call over to your first presenter, Mr. Allison.

With me today is Randy Mayor, Randy Sims, Kevin Hester, and Brian Davis. Welcome to Home BancShares Second-Quarter 2011 Earnings Release and Conference Call. I'm very pleased, and I hope you're as pleased with the Company's quarter. It was the best quarter in the Company's history. Even though in past quarters we've had one-time gains, this was a pure clean quarter, no extraordinary, no noise. So what you see is real earnings power of the Company.

I would like to say a special thanks to our shareholders, our analysts and our bankers. We've been together through some of the toughest economic times since the '30s. We appreciate your support, your trust, and your confidence. Sometimes you may not think we listen to you, but we're listening.

We heard you on TARP, we heard you on the margin, we heard you on the small business lending. We listened to our partners. And again, thanks. The crisis that we've been through is not over, but from an asset quality perspective, we've netted what has floated to the top. I'm sure there will be more that will come up, but with 3 years of a static pool, and that's what we've seen out there recently, we really hadn't had any loan growth in 3 years in a static pool, and a tough economic times, you're going to find out where your problems are.

Let's cover just some of the highlights of the quarter. We had a $4.4 million loan recovery that we announced before the end of the quarter. You remember at the end of the first quarter we told you we thought there would be recoveries there. That was on the large Arkansas charge-off, and we expect some smaller recoveries to be coming in on that. I will talk more about recoveries in a minute. We repaid TARP, $50 million of TARP, on June 6th -- July 6th, excuse me. We are in negotiations with the Treasury on the repurchase of 158,000 warrants.

The Company had record income of $0.45 a share. Towards our goal of $0.50 run rate per quarter, when you think about that, TARP costs us $0.024. And if you remember in the first quarter, we announced we had an offer on the largest piece of OREO that we had in Florida. We had it on the books at $3.9 million. We had a $3 million offer, and with real estate commissions, there was about a $1.1 million loss. I told you I thought we would take. That cost us $0.026. So if you combine the TARP interest cost with the $0.026 cents on the Florida sale, that's a nickel. You add that to the $0.45 and you get your $0.50 run rate. A little quicker than I thought we'd get there, but we didn't have to make a loan loss allocation for the quarter.

Core income for the quarter was a record. You remember the first -- the call at the first-- at the end of the year, the fourth quarter call, we talked about the strength of the income of the Company and the core rate buildup. First quarter was better than the fourth quarter, then the second quarter was better than the first quarter, with over $21.7 million worth of core. We had a sub-50 core efficiency ratio, record margins, record interest income, a good throttle on expenses. They're still ticking down some. You've seen those expenses come down. Looks like we're settled into about $8 million a month. I think we can beat that. Improvement in asset quality, 313 loan loss reserve, 180% coverage on non-performing, and this team ran a 147 ROA. I've always told you I thought they could run a 150, if we could provide the assets to them this team, Randy Sims and his team have done a great job with a 147 return on assets. We just need to find some more assets.

That kind of covers my highlights of the quarter. And kind of forward-looking here, what do we see out there? I think we'll continue to be active on FDIC assisted transactions. I think we'll continue to see improvement in asset quality. We thought we would have some sales completed in the second quarter that have rolled into the third quarter, and we could see marked improvement in asset quality in the third quarter. And we should have more recoveries.

I told you at the end of the fourth quarter that I didn't expect recoveries on the fraud issue on the -- in Arkansas. I'm proud to say I was probably wrong. Looks like we could have a $2 million recovery on that, and possibly, with some insurance claims, could be more than that. So we're optimistic that we could have some recoveries. That should happen -- hopefully it will happen this year. It should happen this quarter but it may not happen this quarter, it may be the fourth quarter. And on the last part of that, there could be another $2 million piece developed, but that may be next year before we get that.

Continued improvement on expenses, and we'll continue -- hopefully we'll announce being able to buy back warrants. With the purchase of the TARP, once we purchase -- once we've paid the TARP money back, and we get the warrants, our shareholders have not had a dividend increase in some time, and I think we'll be talking about it at the board meeting on Friday.

Overall it was a very good quarter, very clean without any noise, and you can see the earnings power of the Company is ginned up. So at that point I'll turn it over to Randy Sims, our CEO and his team for the specific numbers.

Thank you, Mr. Chairman. Last quarter, we announced and discussed the best quarter in operating results in the history of Home BancShares. While it was short-lived, as Johnny has already said, because, once again, I get to tell you the results for the best quarter in the history of Home BancShares.

First of all, I would like to congratulate all our employees that worked so hard to make a difference and improve our banking organization. We continue our focus in 3 areas. First, is profitability and the control of our expenses, protection of our margin, and improvement of non-interest income. The second is efficiency, including the task of improving our Florida acquisitions. Third, and most important, is asset quality.

Our goal is to see continued improvement in our nonperforming totals and ratios. And for the quarter, our ending numbers were very good in all 3 areas. And while we haven't added any new acquisitions, as Johnny mentioned, we continue to be very active in the pursuit of these FDIC failed institutions, maintaining discipline in our bidding process and patience for the right strategic addition to our organization.

So let's begin with some numbers on profitability. We finished the quarter with earnings of $13.5 million or $0.45 diluted earnings per common share, as Johnny mentioned. In comparison to the same period of 2010, our net income was $9 million or $0.29 diluted earnings per share. From an operating net income comparison, we increased our income by $4.6 million or 51.2%. This quarter was the most profitable in the history of our Company.

Diluted earnings per share, excluding intangible amortization, ended at $0.46 as compared to $0.30 for quarter end 2010. We improved by a margin of $0.03 diluted earnings per common share over the first quarter of 2011. Again, as Johnny detailed in his remarks, ending at $0.45 diluted earnings per common share for the quarter, we're getting closer and closer to our goal of a run rate of $2 on an annual basis. Return on assets for the quarter was a record for normalized earnings at 1.47, and our ROA, excluding intangible amortization, ended at 1.54%. Again, record improvement in the numbers as we continue towards our goal of an ROA of 150. We are very, very close to that goal and hope to accomplish it soon.

And as I stated last quarter, we are optimistic with the potential of our Florida markets. At the bank level and on the operating basis before tax, 44% of all assets are now in Florida, but their contribution to income is significantly less, but it is improving. So as we continue to clean up our acquisitions, centralized and consolidate, we believe there is tremendous income potential for Florida. The most important component is our net income is our net interest income and margin. Again, all time records were set for the Company with an increase of 27.6% to $35.7 million compared to $28 million in the second quarter of 2010.

Net interest margin on a fully taxable basis was also a quarterly record of 4.69% compared to 4.3% on a quarter-over-quarter basis, an increase of 39 basis points. Non-interest income ended at $9.1 million as compared to $8.2 million over the second quarter of 2010. However, as Johnny said, included in the $9.1 million was a loss on the sale of OREO of approximately $1 million. As our Chairman stated, without this loss we get closer, again, to the goal of $2 per share. I will now turn it over to our CFO, Randy Mayor, to give a little more color on our income, margin, and other financial highlights. Randy?

Thanks, Randy. Net interest income increased $1.2 million for the quarter and margin increased 8 basis points from 461 to 469. Investment average balances increased to approximately $30 million from Q1 to Q2, however yields were down slightly as we continue to stay short with new purchases.

Average loan balances declined $47 million, however, the average yield increased 18 basis points. The yield benefited from the additional income from the rate mark attributed to the non-covered loans acquired, mainly in the Wakulla transaction as these loans matured or were renewed. The overall yield on earning assets improved slightly from 5.68 to 5.69. The cost of interest bearing deposits declined from 1.01 to 0.97 Q1 to Q2. The main contributor was the decline in time deposit balances of $54 million as we continue to allow acquired Internet deposits to run off. We have $59 million at 175 for Q1 and $31 million at 138 for Q2. The total cost of interest bearing liabilities declined 5 basis points to 1.20 to 1.15.

Overall, we continue to be pleased with the progress of our net interest margin. Randy, that's a quick summary of the margin for the quarter.

Thank you, Randy. Efficiency has also been a focus for us this quarter. Non-interest expense for the second quarter of 2011 was $23.9 million compared to $19 million for the second quarter of 2010. However, we also increased the asset size of our Company by 21% in that same time period.

We ended the quarter with a core efficiency ratio of 49.39%. We are very pleased with that result. We love staying under 50% and we would like to even get better. As Florida continues to mature and improve, we anticipate this ratio to continue to decrease.

Deposits were up 32.6% at $2.9 billion at quarter end compared to $2.19 billion on a quarter over quarter basis. Loans not covered by loss share were down for the quarter ending at $1.8 billion with covered loans now at 23.2% of the total. Stockholders equity was $504.4 million at quarter end compared to $476.9 million at December 31, 2010, with an increase of $27.5 million resulting in continued strong capital ratios. We continue to be positioned with excess capital for additional acquisitions.

Book value per common share was $15.96 at June 30 compared to $15.02 at December 3, 2010. As our Chairman announced, TARP has been repaid from ample liquidity. I will now turn it over to Brian Davis, our Chief Accounting Officer, to give us more information on TARP and our capital ratios.

Thanks, Randy. The strong earnings for the quarter have allowed us to improve our risk-based capital ratios for the quarter. The leverage ratio improved by approximately 30 basis points from Q1. While the tier 1 and the total risk-based capital ratios are improved by approximately 50 basis points from Q1.

Our June 2011 risk-based capital ratios are 13% for the leverage, 17.9% for the tier 1, and 19.1% for the total risk-based capital. The payoff of TARP will decrease our leverage ratio by approximately 120 basis points while the tier 1 and the total risk-based capital ratios will decrease by approximately 180 basis points. The pro forma risk-based capital ratios for June 2011, including the TARP repayment, are 11.8% for the leverage, 16.1% for the tier 1, and 17.3% for the total risk-based capital. All of these ratios are still considerably above the well capitalized requirements. Randy, that summarizes my capital ratios.

Thank you, Brian. I know everyone was interested in TARP and the effect that it had on us. Let's jump to -- and stay with our theme of our third focus. Our third focus, of course, was asset quality. Our numbers are good but we're not satisfied and want to see continued improvement. To that end, our management and employees continue to work extremely hard.

While improvement was not as significant as in the first quarter, we are very pleased with these numbers. Here are just some of the legacy non-covered numbers and ratios. Nonperforming loans -- 12/31/2010 $49.502 million; 3/31/2011, $33.533 million; 6/30/11, $31.229 million. This is what we've been striving to accomplish. Good consistent improvement in the numbers.

And, of course, the story is the same in the ratios. Nonperforming loans to total loans -- 12/31/10, 2.62%; 3/31/11, 1.81%; 6/30/11, 1.72%. Let's turn to nonperforming assets -- 12/31/10, $61.205 million; 3/31/11, $51.425 million; 6/30/11, $51.093 million. Slight but still improvement.

Nonperforming assets to total assets -- 12/31/10, 2.08%; 3/31/11, 1.78%; 6/30/11, 1.75%. How about our allowance? Allowance for loan losses to nonperforming loans, in other words, the coverage of our nonperforming loans -- 12/31/10, 107.77%; 3/31/11, 159.82%; and 6/30/11, 1.8%.

Very good results for this quarter. And again, staying with our game plan of good consistent improvement each and every quarter. And we hope to keep that up. And as is the case with our legacy loans, we continue to put emphasis on the workout of our covered loans, and we've seen improvement in each of those portfolios. So better to hear it from our Chief Lending Officer. I will turn it over to him, Kevin.

Thank you, Randy. I'm pleased to report continued improvement in the asset quality metrics of the legacy portfolio during the second quarter. Again, I would like to thank our entire lending team for the effort involved in this accomplishment.

As Randy mentioned, nonperforming, non-covered loans to total non-covered loans decreased by 9 basis points, and nonperforming non-covered assets to total non-covered assets decreased by 3 basis points at June 30, 2011. While both are marginal improvements when compared to the first quarter performance, when taken in combination with the other asset quality measurements, they indicate a positive trend of overall improvement.

Also, Randy mentioned the allowance of loan and lease losses coverage to our nonperforming non-covered loans. This improvement is due to a combination of a decline in nonperforming, non-covered loans, and the net recovery position that we are enjoying so far in 2011. Non-covered real estate owned increased by $2 million to $19.9 million due to the movement of a large Arkansas credit that we've spoken about in the previous 2 quarters. As I mentioned last quarter, the mix has changed with 82% of legacy real estate owned being located in Arkansas. This was anticipated due to the sale of the largest parcel of legacy Florida real estate owned that Johnny mentioned earlier and the moving to real estate owned of a large Arkansas credit I just mentioned. We are encouraged with the selling activity that we are seeing in our legacy real estate owned.

Early stage delinquencies increased on a linked quarter basis but are improved on a quarter over quarter basis. A significant percentage of this increase this quarter was due to an Arkansas credit that is migrating through the collection process. It was identified as a problem credit some time ago and has appropriate specific reserves allocated to it. It should be in our real estate owned in the third quarter, and we will begin efforts to liquidate the property at that time.

We have reached or are rapidly approaching our first anniversary in all of our acquired banks, and from a lending perspective in the past I have said it would take 6 to 12 months to incorporate our credit culture. I believe we have accomplished that, and we are evaluating new lending opportunities in each of our acquired markets. The workout process continues and our workout team is focused and on task. Randy, overall it was a very positive quarter on the lending side, and we are encouraged by the prospects for the remainder of 2011.

Thanks, Kevin. Well, record earnings, record margin, continued improvement, and good asset quality ratios, as well as strong reserves and capital. It's really nice to be able to sit here and say that it's the best quarter in the history of our Company, and I've gotten to do that 2 successive quarters. And we will work hard to keep that going and the improvement coming. That pretty much covers the report. I'll now turn it back over to our Chairman, Mr. Johnny Allison.

Thanks, Randy. Brian, Randy, and Kevin, good reports. Mike, I think we're ready for Q and A. So if you would fire up the Q and A, we're ready.

(Operator Instructions)

Jon Arfstrom, RBC Capital Markets.

Really nice job.

Thank you. We're proud of it.

Hard to find things to pick on here, but just two items I wanted to ask about. One is loan growth. I think all of you kind of touched on it, and it's kind of the one area that I think we all want to see improve, and I'm sure you guys all feel the same way. But, curious what your thinking is on that, and maybe cut it up into Florida and Arkansas in terms of the opportunities you're seeing is in each of those markets, what it might take to turn that around.

We're seeing a little spark out there, a little spark of loan growth. It's remaining in the good markets like Arkansas. It's extremely competitive price-wise. Florida is not quite as competitive price-wise, but we're very cautious. Kevin, do you want to comment? You see them all, so.

I think Johnny covered it. Here in Arkansas the prevailing rates are such that it's made it difficult for us to grow -- the fact we're struggling to keep some of what we've got because of the low rates we're seeing by our competitors, but in Florida it's the opposite issue. We're just cautious in that market. We've seen a lot of bad loans in that market so we're cautious to get back in there. We're seeing -- we are seeing opportunities there, but we're just cautious.

We approved about $7 million yesterday at that time Conway Loan Committee. So that's new money. We'll close all of those, but we approved about $7 million. And we've approved about $10 million in Florida over the past quarter. So, a little bit, just being cautious.

Can you give us some examples on pricing, some of the irrational pricing? I'm assuming, Johnny, prime is not going to change any time soon, but give us an idea what you're up against.

We're seeing some 4 stuff -- 4.95, 5, we're not going to do that. It doesn't make any sense in this kind of economy. That's a new number for me. I haven't seen that in the past.

We've seen one below 4.

We've seen one below 4 -- on a fixed, Kevin?

For 5 years.

Most of it is in the 5s, and we're holding tight to the 6s. We had a competitor that hired one of our people, and John made a run at us on some of his loans, and we didn't let him have the business. So it's just kind of -- there's not a lot of loan growth, and everybody in Arkansas is trying to steal from each other.

Okay. A bit of a balancing act.

Exactly, it's a balancing act.

And then the other thing I wanted to talk about was the provision. It sounds like you're hinting we might see some recoveries next quarter, but I look at your balance sheet, I see very high reserves -- and I know you like high reserves -- but, if we're potentially entering a period where you have fairly low loan losses, how do you think about the quarterly provision?

Well, the fraud loss item is the one Kevin was referring to that was -- that had a large piece of real estate that is headed through the pipeline, we have a -- an offer on that property now that is substantial offer from a great customer. We do not -- we haven't done all the things we need to do to really get our hands around all of that property yet. It is in OREO now, but it's got some -- what do you say, some hair hanging around it, I guess, we've got to get off it.

So we've got clean that up and hope there's a nice recovery there on that piece of property because all of that income that is coming in every month on that property goes straight to reduction of it because there's no interest income recognition. And there may be a gain on the insurance there because it certainly appears there was fraud committed. We'll have to see about that. Kevin has a large piece of real estate in Florida that should close in the next -- shaking your head?

This month.

Should close this month. It's about $1 million plus gain in that property. So we could be looking at, if things flow right, you could be looking at about $3 million maybe in gains coming in next month got a loan loss reserve or this quarter going to loan loss. So that's pretty nice. We don't see anything really big out there on the horizon.

We've got some stuff to charge off, but it's already specifically reserved. We're well specifically reserved on some stuff. We've got the money there to do it, so keep our fingers crossed, and a deer doesn't run a across the runway on us, John, we might not have to make an allocation the rest of the year.

Yes, okay. That makes sense, thanks.

Joe Fenech, Sandler O'Neill.

Johnny, how do you think about your acquisition capability -- what do you think your acquisition capability is from here, what are the capital thresholds you're thinking about and how much do you think you could add in assets via acquisition?

Joe, we can add about -- the key fire up, leverage ratio, at about 8%. We can add about $1.5 billion, takes it to about 8.1%. Takes TCE down to 7.3%, and we'd let it build back up. So, we think we've got another $1.5 billion out there to buy before we start to slow down. That won't all come in at once, and hopefully we'll continue to crank these quarters out as we're doing, so that may push up to $1.7 billion before it's all said and done as we continue to build capital. These kind of quarters we'll build a lot of capital in a hurry.

Joe, the numbers he's reading you, that would assume no bargain purchase gain.

I'm sorry, no bargain purchase gain?

Yes, no bargain purchase gain. So if there was a bargain purchase gain, it would increase our capacity.

Right, okay. I guess asking the question another way, Johnny, can you talk about how you think about putting excess capital to work if there aren't any more FDIC deals out there -- I know you see some out there but I'm saying in the event they're not, how would you order sort of the remaining priorities in terms of traditional deals, higher dividend, share repurchase, how do you think about that?

Well, I think our shareholders have not seen a dividend increase in two-and-a-half years, and I think it's time to -- and I'm going to recommend to the Board that we look at a dividend increase for our shareholders. And I think that comes pretty quick. We meet tomorrow and hopefully we'll do something with that. Kevin Hester's team is very busy looking at market transactions in the footprint areas where we want to be. We've done, I guess, Kevin, 6 or 7 maybe now? Is that too many? 5 or 6? 5 or 6.

Looking at some market transactions -- we may look at some of those -- you may see us look at -- if we don't -- if the FDIC -assisted deals continue in Florida to be as stupid as they are, they may force us into some market transactions in and around some of our footprint areas. But, you know how competitive it is in Florida, and everybody wants to be in Florida. Some of the other states you can buy stuff and make big gains on, but Florida -- at the end of the day, you are going to want us to make this thing profitable, and we think Florida is the place to be. Did I answer most of your questions, Joe?

Yes, sounds like the dividend increase might happen irrespective of the opportunities you see out there.

We're going to do -- my goal is $3 -- $6 billion, a 150 ROA. That's Johnny's goal. That's a $90 million worth of income. There is going to be the new incentive program for the Management of this company is going to include that at $2, $2.50 and $3 a share, we may even look at buying some stock back to fund that. That's kind of what I am looking at on the short term here is create the incentive for these guys to reach out and help us get to $2.50 to $3 a share, because we're all over $2 right now as you can see.

Okay. Lastly, can you guys talk about other cost save opportunities you might have? You closed the 8 branches in Florida so far this year. Is there any more low-hanging fruit related to the assisted deals, or is that behind you at this point?

We had some -- I'm not real pleased with our expenses. Looks like we're running about $8 million a month, $24 million a quarter. I intended to dive into that more last quarter, and I didn't. I'm going dive into it because it basically stayed flat. We had quite a bit of travel expenses this quarter from -- I do know that the travel expenses were up quite a bit, and then the other under OREO expense -- our OREO expense was up because our 20% of the covered assets, we had a lot of legal this quarter, so that's two items that kicked up. The OREO will probably stay there as we work through these deals. Travel expenses are okay with me as long as we're picking up deals.

But there's not really any great low-hanging fruit out there that I see right now. We've embarked on a marketing program this year. We spent $750,000 last year. We're spending $3 million this year. So that's a big number that's taken expenses up, but I don't see any more low-hanging fruit, not significantly.

Okay, thank you.

Dave Bishop, Stifel Nicolaus.

As we see the margin hit the highs here on a quarterly basis, do you still see room in terms of lowering funding costs there? I know they've come down quite a bit here as you let some of those hot money deposits roll off; but, given the fact that there is that pricing pressure out there, do you think this is a high water mark irrespective of putting aside any sort of other acquisitions here, or do you think you can hold the line or maybe improve it with lowering funding costs?

I'll let Randy Mayer speak to the lower funding costs, but I think we've -- if we hold this margin right in here I'll be pretty pleased. I think Randy said -- and I'll let Randy comment on this, Randy is at another location -- but I think we have about $40 million of Internet deposits left. Randy, do you want to comment on that?

Yes, that's true. And that's going to be spread out, so we don't have quite as much of a gain on that coming in. We have about $21 million left in '11 at 179 and $24 million in '12 at 186 that's going to be coming due on the Internet side. So we do have a little bit of room there, but it's not going to be significant on the liability repricing side.

And on the loan side, we are experiencing a little bit of pressure there; and, this quarter, I kind of in my remarks commented about a little contribution from the acquired consumer loans that we picked up. We had a rate mark on those and quite a bit of those for some reason matured or came due in the second quarter so we were able to recognize some of that mark. And that number will go down a little bit in future quarters.

So hopefully we can hold our own, Dave.

Okay, great. Thank you.

Matt Olney, Stephens, Inc.

Almost all my questions have already been addressed and I just have one housekeeping question. As far as the OREO expense in the second quarter, do you guys have a breakdown of what was made up of that? I know there was a big loss from the sales of Florida loan. Are there any normal maintenance costs in there, or any more write-downs we should be thinking about?

No. No, we had $1 million with Real Estate Commission and all, about $1.1 million loss on that piece of OREO that cost us about $0.036. There may be something jump out at us, but you know how we price that stuff and I thought we had that one priced right, but obviously -- I think we sold it too cheap, that's my feel. But, no, I don't see any more surprises out there on that side, on the OREO side.

If you look at it, Matt, over the past 7, 8, 10 quarters, it's up 100, down 100, up 100, down 100. We've been right pretty much on the money on that OREO. We missed this one. I think I told you we relisted it with a new real estate firm and had 3 offers in a week, so I'm afraid we may have priced it a little too cheap.

I think that was the largest OREO property so now with that behind us, what's the largest OREO property out there?

It was the largest Florida piece. We've got a couple in Arkansas that we've been moving through the legal process that have moved in. One, he mentioned the fraud case, one in northwest Arkansas. Both of those are now in OREO.

We've got 400 acres, if you remember, between the second and third exit overlooking the University of Arkansas.

A lot of cost there. Be a lot of carrying costs there, because it's vacant land.

Yes, it's vacant land. It won't be a lot of carrying costs. That's on the books at 3.7. When you look at the large size we think we will cover a lot more than that out of that property over a period of time. The piece that's moving through the pipeline that Kevin referred to that relates to the fraud is $3.7 million, $3.8 million about -- keep your fingers crossed, that one could be gone with a big recovery in the third quarter or maybe the fourth quarter, but it's coming, because we've got a buyer on it, and it's a nice recovery.

And until we get -- until it comes, we're paying the loan down $50,000 to $60,000 a month every month. So that's the two pieces. They're Arkansas properties and they're both well priced. So you won't see any losses on those. You will see gains on them.

Okay, great. Thanks for the update, great quarter.

You bet, thank you very much.

Michael Rose, Raymond James.

I just had a question, I don't know if you said this -- I'm sorry if I missed it -- did you give the TDR numbers for the quarter?

Kevin can give them.

They are down about $5 million to $63 million at the end of the second quarter.

Okay, but that's the total number. Do you have the performing piece?

Performing is about 87% of that.

87%. Okay, that's helpful. And how should I think about your efficiency ratio over the near term? Do you guys have any sort of -- is that a ratio you kind of look at? Is that something you're managing to? Any commentary there would be helpful.

We don't really manage to it, but we watch it. Everyone knows my expectation is sub 50. So, as we -- hopefully we can get better than that at some point in time with a 147 ROA, though, that's pretty good, I will take that. But we're just -- we just keep our eye on it, we're not managing to it.

Okay, thanks guys, that's all I have.

Kevin Reynolds, Wunderlich Securities.

Great quarter --

Thank you.

And I guess one question I wanted -- and you may have mentioned this, I was trying to keep up with you and do multiple things so I apologize if I missed it -- but, in past quarters you have framed the opportunity to buy failed banks in Florida with a number in size, and I think we've been running around 50 banks that you think might still fail with $16 billion, $17 billion in aggregate assets. Did you mention that number earlier, or could you give me a better -- a feel for what you think that opportunity might be that remains in Florida?

Those numbers are still about the same as they were. We're not seeing the regulators quite as aggressive as they used to be. It's -- people are dotting their I's and crossing their T's, and the competition has been pretty intense in Florida, as you know. Everybody wants to be in Florida because that's the place everybody thinks is going to be the future.

So, we think it's -- the opportunity may not be as good, I think I'd cut $10 billion off of that -- I mean 10 banks off of that and think that maybe we got 40 and probably down from that number, but we are doing due diligence now on banks. We're going down next week on a management deal, and then we have more on the list. We have about $2 billion worth of assets out there right now. Some we'll get more aggressive on than others, and there's several of them. So, we think we'll land something surely in the third quarter or the fourth quarter.

All right, thanks a lot. And, again, great quarter.

Thank you.

Derek Hewett, KBW.

Good afternoon, gentlemen, and very good quarter.

Thank you, Derek.

Following up on your in market -- or, excuse me, market transactions comment that was in footprint, what size banks are you looking at, and are you looking at something that's a bank that's relatively healthy that maybe can't make it in this new higher cost regulatory environment, or are you looking at a bank that maybe has some credit issues that you guys could work to clean up?

Kevin, you want to comment on that?

I think by and large it's been the latter of the two. It's been more the ones that maybe may not fail or could limp through but are just tired of dealing with it, or maybe don't have the wherewithal to come out of the hole today.

That's primarily it. Actually, we've done due diligence on a couple -- out of the group we've done, a couple of them show some possibilities that Kevin agrees -- Kevin's people agrees with their numbers, and that's unusual. Most time you go in and management is not -- is looking at it through rose-colored glasses, but this management team on a couple of these are looking at it pretty realistic, and Kevin's team agrees with the numbers.

So, who knows where we'll go with that. The truth is, as long as we can do FDIC -assisted transactions, we're going do those. When that party is over, then we'll probably move on these opportunities if they're still there.

Okay, great. And in terms of FDIC deals, clearly your focus is in Florida. Any other states potentially that might provide as an attractive return to you guys?

Well, not really. I mean, we're invited in other states to bid where they can't get bidders. I mean, you can make some nice gains out there on some of these trades, but at the end of the day what do you have? So I mean, again, we would look -- if something came up in Texas, we'd look, or something came up in Arkansas, of course we'd look.

But Kevin's got -- they've got such a nice machine running in Florida right now, we've got 25 special assets people down there working together, different parts, liquidating these assets. I'm really -- I don't want to take our eye off the ball. I think we stay with what we do. We stay disciplined, and the Company is doing very well right now. Just stick with our knitting.

Okay, great, thank you. And my last question is a housekeeping item. Do you have the balance of new additions to NPAs? I think the number was around $60 million last quarter.

I don't have that.

New additions was about -- it was about $5 million. It was two or three different relationships.

One of them is a relationship -- they're all specifically reserved, though. You don't need to worry about that.

These were all ones that we're aware of that we are working through the pipeline. and are specifically reserved.

Okay, great. Thank you.

Andy Stapp, B. Riley and Company.

Hello, guys, nice quarter.

Thank you, Andy.

I know you guys are below $10 million, but can you talk -- what you see in regards to the Durbin amendment and what you're doing to offset any negative consequences?

Well, we're not doing much. We're kind of laying back, waiting. We haven't really taken any action on that. You're talking about maybe -- mainly the interchange fees? Is that what you are talking about?

Exactly.

We really haven't seen much change in that yet. Randy Mayor, you got any comment?

We had made some changes or adjustments probably almost a year ago to kind of prepare for some of the things that we saw coming down the pipe, regulatorily, so we have already experienced some of that as far as the NSF fees and some of the other things that are related. But the interchange fees, we don't anticipate that to be a big impact, unless the routing of the transactions becomes an issue that the merchants can determine that and then, if that's the case, some of that could flow down to us as a result of the larger bank restrictions.

Andy, actually, we've seen NSFs the last 2 months go up. We had forecast -- they have not gone down as much as we forecasted them to go down, and don't know if it's trend, but the last 2 months -- 2 months in a row -- that chart has started back up. So,2 months doesn't make a trend, but it looks pretty good.

Yes, okay. That's all I have, thank you.

Brian Martin, FIG partners.

Hello, guys, nice quarter.

Thank you.

Johnny, those market transactions you were talking about, just so I'm clear, those are in Arkansas, those are Florida, they're both?

They're Florida.

In Florida, okay, so those are in Florida. And second, maybe a question for you, maybe Randy or Brian, the FDIC indemnification income, how do we think about that now, the drop this quarter, kind of where that's been trending over the next several quarters, or just as you look out?

Brian's got that for us.

Hey, Brian. Yes, it did trend down this quarter, and because of the nature of the way that is set up it will always be trending down until you add some more to the pot. For example, we had $1.5 million of that in Q2; but in Q3, if the projection still holds true, we'll have $1,240,000 of indemnification accretion income, then the next quarter it will drop down a little bit more and it will be about $1,144,000. And then, for example, in all of 2012, the number would be more like $2.7 million.

Okay, for the full year, absenting any new deals.

That's correct. If we have new deals, it could obviously grow; but if we don't have any deals, just status quo, because a lot of the indemnification accretion is front-loaded in the first 3 years.

Right, okay, that's helpful. Thanks, Brian. Two other things, Johnny, just with the -- or maybe Kevin, just with the loan growth and just demand not being what it is and being a little bit cautious on Florida, are you guys thinking about adding new people to the staff to bring over business, or is that not necessary, given the staff you currently have, or what are your thoughts there?

It's possible. If we were to find a person that we trusted that we felt like had our credit culture, we might would do that, if we felt they could bring something, but it's not -- it's not a have-to case.

Okay, so it's more the focus on the deals at this point rather than the people.

Right.

Okay.

Just being cautious.

Okay. And lastly, Johnny, maybe I just missed this, but the recoveries that you talked about, you talked about maybe $3 million or so. Can you just walk back through what recoveries you expect? I guess they're just kind of -- just a time on it. I thought you said there was one, maybe it was the insurance piece that was in 2012 or, I guess I just want to --.

I think we'll have to battle -- there's about 4 -- let's take it in 2 pieces. There's a little over $4 million plus out there on one transaction, I think, and half of it is the insurance piece, and it may take awhile on that. The other piece is selling the OREO. We have a deal on the OREO. We have a nice offer on the OREO from a good customer that we're willing to finance with a substantial down payment, but we haven't cleaned up all the ins and outs of the property to where we can actually physically sell it yet.

So we're working on that part. Hopefully that will come the third quarter, and if it does, there's a $2 million plus recovery there. And Kevin has a piece of property he should close in July in Florida that's got about $1 million gain in it. So, you could see a $3.7 million non-performer go away in the third quarter if we sell that big piece of property with loan loss reserve fed with about $2 million plus. You could see $3 million go to loan loss reserve this quarter, if everything works out, and about $4.5 million of non-performers go away.

So there's substantial -- there's come substantial changes in asset quality. In addition to that, at the last meeting, they reported to the Board -- our different regions reported the Board is what OREO assets they had sales on, and sounds like another $1 million or $2 million worth of sales right now on OREO. It could be a nice quarter for us.

Okay. So $3 million possibly this quarter, then that $2 million piece on the one transaction could come next year, but that would have to come in the form of insurance.

That's correct.

Okay.

That's correct.

So $5 million total potential, or maybe a little bit more, give or take, based on --

$5 million on 3 credits.

Okay,

If you heard what I said about the northwest Arkansas property, it's on the books at $3.7 million that, I mean, when we got the appraisal, we got a fire sale appraisal that we could sell it in 30 days for $8 million. So, we wrote it down, we've had some sales, and we're continuing to apply everything we sell to principal and we priced about $1.6 million worth of property the other day. There will be gains on those properties, so I don't anticipate -- I was embarrassed about the OREO loss this quarter. We don't do that, we usually have them marked right. I think everything else on there is marked to where we could see gains.

Okay, thank you very much.

It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you, Mack. Again, we appreciate your support. It's been, as I said earlier, we've been through some pretty strange economic times, but we've gotten through them, and we'll continue to get through them, and we look forward to talking to you in 90 days. Thank you.

And we thank you, gentlemen, for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you and take care.