Home BancShares Inc (HOMB) 2012 Q2 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated second quarter 2012 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 participants in this call are John Allison, Chairman; Randy Sims, Chief Executive Officer; Randy Mayor, Chief Financial Officer; Brian Davis, Chief Accounting Officer; Kevin Hester, Chief Lending Officer.

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 2012. At this time, all participants are in a listen-only mode and this conference is being recorded.

(Operator Instructions)

It is now my pleasure to turn the call over to our first presenter, Mr. Allison.

Thank you, Amy. Welcome to Home BancShares' second-quarter 2012 conference call and earnings release. The Management team is, as Amy said, here with me today. I just have a few comments. I'm not going to get into the numbers really. I'm going to let Randy Sims get into the numbers, but we've developed a reputation over the years of telling it like it is. If it's bad, we tell it. If it's good, we tell it and we take action to deal with it.

You've heard me make this statement, some other people, it is what it is. What it is today is the best quarter in our Company's history. I'm just going to hit these high points as I've said, and Randy will cover the numbers. But we had record quarterly earnings, record interest income, record operating earnings, record core pretax pre-provisions with a 2.67, and I'm proud to say we talked last year about a run rate of about $80 million and I thought we could get there if we get another deal. We did over $25 million in the second quarter for a run rate of $100 million and very proud of that. That's a significant increase. Revenue for the quarter was $56.1 million versus $52.7 million last year and on a linked-quarter basis, up $3 million from $53.1 million, pretty significant.

In addition to that record efficiency ratio, we maintained strong margins flat with the first quarter and a ROE on tangible common equity, and you know I call that train riding money, was north of 16%. Improved loan pipeline, careful and cautious about the loan side of it, we'll begin to see a little more activity out there, but you've heard me make the comment you cannot push a rope loan. Loan growth will come when loan growth comes and you can't make it happen. If you try to make it happen, somebody's going to get in trouble. We had good improvement on the expense side, as I said, on the efficiency ratio and we'll continue to do better as Donna Townsell is now leading the [before] program for the Company and that will be implemented shortly. Improved asset quality, the best in years, strong reserves, 2.45% to 3.21% depending on how you count them and a 10.3% tangible common equity. We had increase in non-interest deposits and as Randy Sims pushes a reduction in inexpensive time deposits.

This isn't a complicated business. It has to do with revenue and expenses. You either raise the revenue or lower the expenses to increase profitability or both. While maintaining stable asset quality, we were able to increase revenues significantly while freezing expenses, only up $38,000, which results in record profits. With a $25 million run rate, that equates with that loan loss reserve, things stay as they are, somewhere in the $216 million range. And to hit our new goal of $250 million, that'll take improved efficiency ratio and a deal or two this year and I'm optimistic that the deals will come. It'll take $27.5 million run rate a quarter, that equates to about $110 million a year.

So to say $250 million is out there, I can see it. We just need two deals to get there, as we did to get to $80 million as we have gotten to $80 million and onto $100 million. I hope you're as pleased with this powerful quarter as I am. If you do the right thing, you work hard, you do smart deals, continue to raise the bar, and listen to our investors, things have a way of rewarding all of us. Speaking of rewarding our shareholders, our dividend has fallen below 1.5% and it is my plan at the Board meeting Friday to recommend an increase in dividend and I think 1.5% is a reasonable level. I don't know if that'll get approved, but I will recommend it.

We'll continue to be in the market buying stock. We think that is important. That's another use of our capital, but we'll continue to keep plenty of dry powder for deals in the future. I guess I've rambled enough about this, and now let me turn it over to Randy Sims so he can give you the specific numbers. Go ahead, Randy.

Thank you, Johnny. As you said, it was a very good second quarter. As I have in the past, I want to congratulate all our employees that worked so hard to make a difference and improve our banking organization. It is truly a team effort that makes us successful. The second quarter of 2012 is the most profitable quarter in the history of our Company, as our Chairman said. The second-quarter earnings are $1 million, or 7% better, than the previous record earnings reported for Home BancShares. This was possible with a balanced improvement in results.

We continued to control our expenses ending the quarter with a 46% efficiency ratio. We continue to have record net interest income and our asset quality totals and ratios continue to be very good with improvement seen in both our non-performing non-covered loans and assets. We are active in the hunt for additional acquisitions. We are as busy as we ever have been, looking for banks. As I said last quarter, each opportunity seems to be quite different from another. However, we will continue to hold true to our discipline and patience for the right strategic addition to our organization. We finished the second quarter with earnings of $15.5 million or $0.55 diluted earnings per common share.

This compares to $12.9 million of net income available to common shareholders in the same quarter of 2011 or $0.45 diluted earnings per common share. The Company increased its second-quarter net income by $2.6 million, or 20.3%, for the three months ended June 30, 2012, compared to the same period of the previous year. In reporting this record net income, there are three transactions that I would like to mention. First of all, there was a $359,000 gain on the sale of bank property that went into our quarter-end income. This was adjoining property to one of our branches. Second, we had net gains on the sale of OREO of $159,000. Third, during the second quarter, impairment testing on the estimated cash flows of our covered loans, in that testing it was noted that two pools evaluated had experienced material projected credit deterioration.

As a result, the Company recorded a $6.6 million provision to the allowance for loan losses. Since these loans are covered by loss share with the FDIC, the Company was able to increase its indemnification asset by $5.3 million, resulting in a net provision for loan losses of $1.3 million. As you're aware, accounting standards require any loan pool impairments must be taken immediately and any excess gains are taken over the life of the loan. As we have in the past, we address any concerns as soon as they are discovered. I would like to add that we are very pleased with the performance of our 26 pools for the six FDIC-failed institutions that we purchased and see no trend that concerns us. If anything, we feel like the performance of many of the pools will result in the recognition of gains, but these two pools needed some attention after a recent evaluation. I say all this to make the point that there was some noise in the second quarter and yet we were still able to make our goal of $0.55 per share.

As an aside, if you take out the noise of the gain on the bank property, the OREO gains, and the provision for the FDIC loan pools, then our earnings are $0.565 per diluted common share, or the low end of rounding up to $0.57. Return on assets for normalized earnings was at 1.53% and our ROA excluding intangible amortization ended at 1.61%. Our return on average TCE excluding intangible amortization was 16.05%, as compared to March 31, 2012 at 15.03%. Our high-performing Arkansas banks continue to produce record numbers and we are seeing improvement in the Florida and Alabama regions. In fact, based upon an internal daily run rate, all seven of our banking regions show upward trends in income. With a strong Arkansas, it is good to see Florida and Alabama with the trend of income growth. At the Centennial Bank level and on an internal analysis, 52% of all of our assets are in Arkansas, 6% of assets are in Alabama, and 42% of the assets are in Florida.

Now, let's switch to the most important component of our net income -- net interest income and margin. Net interest income was a quarterly record at $39.2 million as compared with $36.5 million at March 31, 2012. Net interest margin on a fully taxable basis remains strong and was the same as in the first quarter at 4.65%. By the way, the effective yield on a fully taxable equivalent basis on non-covered loans was 6.21% and on covered loans was 7.91%. Covered loans are 18% of our total loan portfolio. Non-interest income ended at $11.1 million as compared to $10.1 million in the first quarter of this year. Non-interest expense for the second quarter of 2012 was $24.4 million compared to $24.4 million in the first quarter.

Actually, as Johnny said, I think we were up $38,000 for the second quarter, but that is pretty consistent for the first two quarters of the year and Randy Mayor will talk a little bit more about how we did that. We're doing a good job in keeping expenses under control. As a result of that, we ended the quarter with a core efficiency ratio of 46.87%, which was improvement of 252 basis points from the same period of the previous year. We continue to be pleased with our efficiency ratio. Switching to deposits, we ended the quarter at $3.29 billion compared to $2.86 billion as of December 31, 2011.

However, we continued to eliminate non-customer time deposits throughout the system of branches. I'll stop at this point and as I said, I'm going to turn it over to our CFO, Randy Mayor, to give a little more color on what we have just discussed. After that, Randy will pass it to Brian Davis to give us some more information on our capital numbers. Let's get started with Randy.

Thanks, Randy. As Johnny mentioned, our total revenue for the quarter was $56.1 million, which was an increase of $3.1 million, or 5.75% from Q1. ROA also increased from 1.52% for Q1 to 1.53% for Q2. Having the Vision transaction in for the full quarter helped contribute to these increases. Net interest income increased $2.6 million, or 7.2% over last quarter, the net interest margin remained stable at 4.65%. The earning asset yield declined 11 basis points from 5.44% to 5.33%, mostly due to change in mix. The yield on loans remained steady at 6.52% and average loan balances increased $116.6 million or 4.89% during the quarter.

However, the average other earning assets, including investments in cash, which are lower-yielding assets, increased $109.9 million or 12.4%. The yield on interest-bearing deposits improved 12 basis points from 0.73% to 0.61% for the quarter, as we continue to try to manage our cost of funds. We also saw a positive change in our mix in deposits. With average time deposits declining $12.4 million, while average non-interest-bearing deposits increased to $61.9 million. Looking at non-interest income, we did have some extraordinary items that totaled approximately $707,000 before tax. If you discount the extraordinary items in both quarters, non-interest income was up $155,000 over last quarter. Service charges and mortgage origination income were up, offset by declining insurance revenue, FDIC indemnification accretion and other income.

Overall, non-interest expense remained relatively flat from quarter-to-quarter. However, we had $1.7 million in merger expenses in Q1 that were not repeated in Q2. In Q2, salaries and employee benefits increased $517,000, occupancy and equipment increased $121,000, and data processing increased $280,000, primarily due to the inclusion of the Vision employees and facilities for the full quarter. Even with these increases, the core efficiency ratio for the quarter remained very strong at 46.87%. Overall, as you mentioned, Randy, this was the best earnings quarter in our history. With that I'll turn it over to Brian.

Thanks, Randy. During the second quarter of 2012, we increased our capital by $15 million and $12.7 million of this increase was from retained earnings. For Q2 2012, our leverage ratio was 11.1% compared to 11.5% at March 31, 2012. Tier 1 was 15.8%, compared to 15% at March 31, and the total risk-based capital was 17%, compared to 16.3% at March 31. Additionally, book value per common share was $17.64 compared to $17.11 at March 31. Tangible book value per common share was $14.53 compared to $13.96 at March 31, and the TCE ratio was 10.3% compared to 9.7% at March 31. Randy?

Thanks, Brian. It was a very good quarter on the loan side, too. Our asset quality metrics have been very good throughout the year with improvement in already strong numbers each quarter end in 2012. We saw improvement in both non-performing loan performance. For these numbers and more information on asset quality, I'll turn it over to our Chief Lending Officer, Kevin Hester. Kevin?

Thanks, Randy. Before I tell you about asset quality, I want to take this opportunity to thank our entire lending team for their efforts in improving this Company. I'm very proud to be a part of Home BancShares and it is because of the strong team that we have throughout our footprint. As Randy mentioned, the results of the second quarter reflect continued improvement in the asset quality metrics of the Company. Our non-covered non-performing asset ratio improved slightly from 1.22% to 1.19%, as did our non-covered non-performing loan ratio from 1.35% to 1.28%. Our allowance for loan losses as a percentage of non-covered loans declined slightly from 2.49% to 2.45%. However, if you added the Vision acquisition discount to the allowance for loan losses, the combined figure would be 3.21% of non-covered loans at quarter end.

The allowance for the loan loss coverage ratio improved slightly from 184% to 191%, reflecting continued strong coverage of our non-covered non-performing loans. Non-covered real estate loans remained level in the second quarter and the mix continues to be heavily weighted toward Arkansas at the present time with 85% of the June 30, 2012 balance of $14.5 million being located here. Net charge-offs in the second quarter remained low at 23 basis points. And as has been the case for some time, the specific exposures allocated to those credits were higher than the amount being charged off. Specifically, in the second quarter, we charged off $366,000 on loans that were eligible for a specific allocation, and the allocations on those loans were $515,000. In addition to the improvement in asset quality, I'm encouraged by the uptick in new loan activity in virtually all of our markets.

We are evaluating more new loan opportunities than at any time during this credit cycle, but we are also seeing more low-rate long-term offer sheets than at any other time and across our entire footprint. We are striving to obtain quality loan growth, but we are unwilling to burden the bank's balance sheet with long-term, low-rate assets that will impact earnings in a rising rate environment. As I've said in recent quarters, the second quarter of 2012 was also a solid one from an asset-quality perspective and we continue to be optimistic with the opportunities that are on our horizon. Thanks, Randy.

Thank you, Kevin. More records broken, our asset quality ratios are at strong levels, and all regions showing improvement in net income growth. It continues to be a very good year. I'll now turn it back over to Johnny.

Thank you. I think it's all been said, but I'm sure you have questions and we look forward to answering your questions. Amy, we're ready for Q&A.

(Operator Instructions)

Michael Rose, Raymond James.

Wanted to get a little bit more detail around the provision that you took this quarter. I understand it seems like it was kind of a one-off deal. Given that your coverage ratios are so strong and asset quality continues to improve, would you expect that you wouldn't have to book a provision in future quarters if trends continue?

I'll let Kevin talk about the exact charge-off and what he's seeing the pools, but from the legacy portfolio, and he'll discuss the covered portfolio, I don't anticipate -- I guess something could come out of the blue, but as I've said in the past, there are no changes at all. Actually, when you look at the asset quality matrix that improved for the quarter and don't forget, that we have the right of put-back of about $7.5 million, so I think on that sheet you saw, some Alabama loans that were past due, that won't be ours, those will be put back. Don't forget, we got $7.5 million worth of put-back there. Actually, the asset quality was a little better than it showed as a result of put-backs. Kevin, you want to talk about the charge and what your pools look like?

Michael, we look at those pools quarterly. We had a couple pools that were nonaccrual pools from one of the original FDIC acquisitions that needed some impairment. We continue to look at those quarterly. 22 of the 26 pools actually have a higher credit mark percentage than they did the day that we acquired the bank. Two of those four needed a little bit of work on them and we continue to look at all of them on a quarterly basis.

I guess we could have argued and taken some out of existing loan losses there, but we didn't. We didn't think that was the thing to do. We just went ahead and it was something we had to take and we took it and got it behind us and don't anticipate any more problems there.

All right. Thanks for the color. Switching to the margin, I think it was a little bit better than I would have expected. Can you talk about the drivers on a go-forward basis where you can mitigate the pressures that you're seeing? Thanks.

I'm going to let Randy Mayor talk about what he sees and what he sees coming up.

Yes. On the asset side, we had a little bit of a change in the mix. Some investments on average and the cash accounts on average were up a little bit, the loans held relatively stable for the quarter. On the liability side, we think we do have a little bit, a few good months coming up as far as the repricing opportunities. We think we have a little bit of room on the liability side, but we hope that margin will remain in the ballpark of where it's at now.

And let me say this, we haven't written a loan with a four in front of it. We've written a loan with a five in front of it, but we haven't written a loan with a four in front of it and we take them one at a time, so we were able to maintain margin for the quarter. We were pretty pleased with that. I'm just back from the road and I told the market to expect, and I believe this is reasonable to expect, 450 or above for the year.

Thank you.

Joe Fenech, Sandler O'Neill.

Can you guys talk about what you're seeing specifically in Arkansas in terms of loan demand? I know your competitor last week was very optimistic about loan growth prospects, but there wasn't much detail provided on pricing for the new loans coming on the books. Just give us some color on what you're seeing specifically in Arkansas and the specific terms you're seeing competitors offering in the market?

We're seeing -- we were seeing -- I don't know where it went -- maybe it just stuck its ugly head back in, but we were seeing some fixed rate in the threes in Arkansas, which we're not going to do. I don't know how you spell three. We saw some of that, but some of the other competitors are not acting that way. We're seeing some silly stuff from here and there, but not as bad in Florida actually as it is in Arkansas. I guess the Arkansas economy's remained really strong and it doesn't appear to be quite as intense a competition right now in Florida as it is in Arkansas. But we saw some threes. We saw some silly stuff in the threes and five-year fixed and we're just not going to do that, Joe. Does that answer your question?

Yes. Is it just rate, Johnny, or is it other structure, too?

It's fixed five-year stuff and fix seven-year stuff at low rates and we're just not going to sell our future. We just never have. We could have. We're sitting on $300 million in cash drawing 0.25, but it makes sense to put one out there at four- something, we're just not going to compromise on that. It worked for us, we were able to hold our margin, we'll continue to do that in the future and we're not going to get silly.

Okay. Then also, in better times you guys have always maintained very strong reserves. You're at 2.45% as you pointed out, the allowance of non-covered. I know it's higher than that if you adjust revision. But is there an absolute threshold, Johnny, that we're not going to see the allowance ratio breach there?

Joe, if you remember, in my past company and even this company, we've always run a 150, so I think that as things improve and loan growth comes back -- and let me say this, we've got the biggest pipeline we've had in years, so I don't know if that's a trend yet. It's too early to tell and you can't force it, but I think things are hanging in pretty good.

Okay. Lastly, just in terms of the breakout that you guys provide on loans this quarter on an end of period basis, were there some reclassifications there? Because it looks like some categories were down quite a bit and others were --

I knew that was coming. Actually, we had an automatic system that would move it from acquisitions development into commercial real estate section. I don't know if someone flipped the switch or it didn't work or whatever, I was on the road and someone said, you really got a heavy concentration in acquisition and development and I looked at it, and I said, we don't have that much in there. We came back and scrubbed and that was an uh-oh on us, but we corrected it and got it moved over in the right basket. Some of that stuff had been in that basket for a year that was under construction that has been completed now. That was an uh-oh on our part and that's why you saw the big move.

Okay. Thanks, guys.

David Bishop, Stifel Nicholas.

You guys alluded to seeing some activity in Florida as well. Maybe you can speak about what you're seeing in terms of loan demand and how the pipeline's shaping up heading into the third quarter?

It's actually looking -- what I believe to be fairly strong. I'm pleased with Arkansas. I'm pleased with Florida, what's coming on there. We approved about a $7.5 million Key West loan yesterday. What did we approve yesterday, total, Randy? 10 or 12?

Exactly.

10 or 12 yesterday --

It was a good executive loan committee.

We have those every Wednesday and that's really steaming up. We picked up a big loan out in, I think I told you about it, Oklahoma City, our big apartment builder. That will start pulling up. It's better now. We were actually up through 60 days. The loans were up about $8 million in the period at 60 days. We had a huge payoff. One guy was a big customer had a bunch of Git-N-Go stores and he sold them for cash to a public company and that was a big payoff for us. We actually had a pretty decent run the second quarter on the loan side. We didn't get them all closed, but optimistic, we'll see. One quarter doesn't make a trend as you've heard me say, and you can't make it happen, it happens. If you make it happen, you get in trouble, so we'll just let it run what is. Without the payoff, it could have been a different quarter.

Yes. It would have been a different quarter. We'd have been up instead of down. We were close.

Circling back to the NIM, looking at the CD costs, still its got a one in front of it, still some opportunities to reprice on the CD side?

I think we've got maybe as big a repricing opportunity in the next 90 days as I've seen in the Company in a while. Randy Mayor is shaking his head yes, but some of the covered assets that we bought, we didn't bust the CD rates on some of those, David, back when we bought the bank because the maturity was fairly short. We thought within a short period of time, we let this one run a little longer than I anticipated, but it's nice repricing opportunities happen over the next -- should wrap up about October.

We actually have a pretty structured program. We've talked to all of our Florida, especially our Florida banks, where we're moving to try to lower non-customer CDs. If it's a non-customer CD, they either have to convert them to a core customer with a checking account or we're letting the CD go. It just doesn't make any sense if we can't convert that customer to a Centennial Bank core customer to keep the CD. That structured program is also going throughout the system. I think we're going to see some opportunity on the liability side.

Okay. Great. Thank you.

Matt Olney, Stephens.

Sound like your getting some good traction as far as the loan growth initiative. I wanted to ask on the expense side, I get the sense you think there's additional efficiency improvement in the future. Do you guys have any goals or can you share this outlook as to how much you think you can improve the efficiencies going forward?

Well, just came in the room just a few minutes ago was Donna Townsell. If you remember, Donna is the one that headed up the efficiency study for Arkansas that resulted in the substantial reduction. With the addition of the six banks and the Vision acquisition, we have not implemented the efficiency study in Florida and I'll let Donna talk to what she's got up her sleeve, but so far as having a direct target, I don't have one. I just know if we did 46 last month, we can beat that sometime in the future.

Hi, Matt. We have realized some overlap, like in our branches due to the Vision acquisition. We actually closed close a couple last week. We'll continue to look at our footprint, look for ways to have lease improvements for savings. Besides just looking at the buildings, though, we plan to look at our sales like we did in Arkansas. Make sure that we are being efficient in our processes, doing things in the right area. Sometimes that requires repacking the refrigerator to make things make more sense, so that's going to be an ongoing process for 2012 to continue to look at that.

To answer bottom line, your question is that we don't have any defined goals there. We just know that there is some opportunity there. A lot of our culture rolls straight into Florida immediately. The Arkansas culture rolled in. So there won't be as much savings there as there is here, but I think there's some there. Over the next six to nine months as she rolls out her program, we'll see what we can wring out of there.

Okay. That's very helpful. Lastly I want to ask about M&A. I think on your last conference call, Johnny, you narrowed your list down of M&A targets to about four banks. Can you give us an update as far as your M&A target list?

Yes. I thought I was going to be able to announce one today to you. I've been out of town a little bit. It's been a roller coaster. It's been on, it's been off, it's been on, it's been off. I have to say I think it's on right now. I'm not ready to announce it, but of the four, one of them we lost. It's gone, so we moved to next. Then we moved to this second transaction and it's been on and off, on and off, as I said. But I think it's probably going to be on and I think it'll probably happen in the next week. Randy Mayor, are you shaking your head yes or are you not shaking your head at all?

I'm not shaking my head either way.

He said it's been up and down so many times he's not sure, but I think were close. I think we're close on that deal. Kevin Hester has done due diligence on another deal that's a market transaction. I don't know if we can put together yet or not, but it has some similarities to the Vision deal to bring in around $100 million in loans and deposits and some branches in our footprint. I haven't see his numbers yet, I don't know if Randy Mayor's run the pro forma on it yet, but we signed an exclusive and done due diligence on it and we're waiting on Kevin's numbers to come back. The deal I thought at that we could announce, we've already done due diligence a couple of times and we're short of a few hiccups. I think we're ready to move forward. I think you'll be seeing some stuff, activities coming out of us here in a short period of time.

Okay. That's great news. Thanks for your help, Johnny.

Kevin Reynolds, Wunderlich Securities.

Good quarter. Better than a good quarter, right? Record quarter. Question for you, it's a little different track. Matt answered a lot of the questions I had there, but, Johnny, you're the largest shareholder of your organization right now. You just put up your fifth straight record quarter and your stock's down over 5% today. You want to comment on that and maybe is there anything that you think maybe somebody on the Street might be missing in your performance out there today?

I have no idea why the stock would be down 5%. Actually, I thought it'd run; our Arkansas competitor had a good quarter, but didn't have revenue growth and his rolled up 8%. We have a record quarter with revenue growth, with improved asset quality, and good cost controls with a bright future in front of us, with the ability to, you know what Arkansas is running on ROA, strong, strong ROA. And as we improve Florida and Randy Sims reports all regions showed increased profitability last month. So last month or last quarter, Randy? For the quarter. That's a positive.

As we said in the past, if we ever get Florida up from anywhere near the performance of Arkansas, you'll see a marked increase in earnings in the Company. Plus the fact that we're going to do a couple more deals, plus the fact that Donna is starting on her cost control in Florida, I don't know why anybody would be a seller in the stock today, but that's their choice. If they want to sell, let them sell and get out of the way because the stock's going to move up, I think.

Thank you. Does that mean that you guys might be stepping up the buyback out here?

I'm certainly not afraid to do that.

Okay. Thank you. Good quarter.

Let me say one thing. We have good capital. We've maintained good capital. We have a trust preferred that is -- we're paying about 680 on, so about $15 million. We have notified the people or filled out the app, we're paying that off. We're pretty smart people, kind of like we were on the TARP. We're paying 680 on that trust preferred and we're drawing 0.25, so you can figure out the math.

We'll be looking more at those trust preferreds over the next period of time. I think the next level of trust preferreds is at 360. Isn't that about right, Randy Mayor, about 360? We be looking at those deals to get the cost of funds down, too. We called that one and notified them that we're going to pay it off, so that's a nice little kick. That could be a couple of pennies for us.

All right.

Stock's dropped 5%, I don't have any idea. I don't know where I've ever seen the future brighter.

Okay. I appreciate that commentary. And like I say, good quarter.

Brian Martin, FIG Partners.

Johnny, those trusts you talked about, when does that take effect? Is that a third quarter event?

That'd be September. The $15 million as quick as we can get it paid off. When I look at it, Randy Mayor and I looked at it yesterday, I said tomorrow. Get Brian Davis to pay them off tomorrow. We can't paid off until September 15 is quick as we can pay them off. They'll be paid off the morning of September 15.

Okay. And those other ones you talked about, those just have a later date on them?

We're going to pay the $15 million off first. We're very protective of our capital ratios. We ought to $15 million next quarter in that range and we're paying off $15 million, so the capital ratio will remain about the same. Then we may take a bite then and do the next $10 million, take a bite, then do the next. I think under BASEL III, after '13, you have to eliminate 10% a year. We're just kind of getting out in front on this deal because we don't need the money and that's expensive money. When we did it, 3.60% looked like a great rate, 3.60% doesn't look like a great rate today.

We're just going to pay it off. We're going to get out in front. If rates start moving up on us, we may sit on it for a little bit. We got $40 million of it. Some of it's at LIBOR plus 3.15%. We'll be evaluating all of it.

Okay. How about just going back two those pools for a question, what were the pools that needed some help this quarter, what type of pools were they, specifically?

They were to non-accrual pools, loans that were made up of non-accrual loans, the day that the bank failed in both cases.

It wasn't specific to construction or commercial real estate or is it not broken out that way?

One was -- let me look that up and I can tell you in just a second.

It's just a basket of non-performings, primarily. You could have a bit of everything in it.

One was single-family non-performing and then the other was just all non-performing, just other. It was a mix of loans.

Okay. I got you. Johnny, the loans that you talked about the pipeline being as good as where it's at, how optimistic are you in closing some of these versus just having the pipeline out there at this point? Do you expect it to translate into --

They don't make it to my level. When they get there, to that committee level, the big committee level, when they get to that, I'm pretty confident that 80, 90 -- I'd hate to go through the effort and not close it, I don't know of anything that we, lately, that we've committed to that hasn't closed or is not going to close. I won't say 100%, but I'll say that I think it's a high percentage.

Okay. All right. The drop in fee income this quarter, maybe Brian Davis or someone, on the FDIC part, was there something to that with the provision you put back up? How do we think about that going forward, Brian?

No. Those two are not related. That drop in the fee income is related to the initial marks that were set when we had these acquisitions and it's basically the accretion of the net present value. As this FDIC indemnification asset gets smaller, it gets smaller. Just to kind of give you some projection for numbers, it's projected to go down for the next couple of quarters. For example, next quarter it's probably going to be in the 645 range. By the time you get out to 2013 on a year-to-date number, it's probably going to be more in the 650 range for the whole year-to-date because those indemnification asset will get smaller and the net present value of it will get less and less because you get closer to the end game.

Okay.

Brian, you've got to get these failed banks up to stream, because it is significant to see the reduction in accretion that's coming in now versus last year. It's $1 million a quarter or more. The first two years are pretty drastic and then it starts to level out somewhat. But this company has been able to continue to produce good earnings while swallowing those reductions in accretion, which is telling me that the performance of the Company has stepped up significantly both in Florida and Arkansas.

Okay. Perfect. The last two things, the OREO that you guys have in the books, is there anything that's in the pipeline to be sold or you're optimistic on that's going to get resolved here in the near term?

Brian, we continue to move things in and out. There are things under contract all the time. Of significant size, I don't know of anything of the three or four largest ones necessarily, but we're continuing to move things in and out.

Okay.

And having a lot of activity there.

We're selling lots of stuff. I think the biggest piece to OREO we got is in Northwest Arkansas. It's 400 acres and we got it on the books now I think at about 3.6. It's got to be worth twice that. As Northwest Arkansas heals up, we'll peel that out. I could sell today at 3.6, but I'm not willing to take that for it. That's one we just said we're just going to put on the books and wait it out.

Okay. All right. Last one, just for Kevin. Kevin, just if you have any color on where the classified assets were this quarter and what the TDRs were? That's all I had.

Classifieds dropped about $3 million or $4 million I think. You showed them maybe at a $106 million number. They should be down at $102 million range. TDRs total $49 million and performing out at $42 million.

Okay. Thanks for taking the questions, guys. Nice quarter.

John Arfstrom, RBC Capital Markets.

Just a couple follow-ups. You talked earlier about the pipeline, but just curious, I don't know if you could give us a specific breakdown on Florida versus Arkansas, but just kind of curious, the strength of each pipeline, if you could, relative to maybe where we were last quarter?

Johnny, I think in each of the regions, we're seeing an improvement. Each of the Florida regions, and each of the Arkansas regions.

It's probably balanced. It's probably about 50/50. It's probably about 50% coming out of Florida and about 50% coming out of Arkansas.

When you say Florida, let's don't forget Alabama. We're seeing some growth there, too.

I'm considering South Alabama in the Panhandle with Florida.

We're going to have to rename this. Were going to come up with a creative name.

Well, you work --

Flalabama or something.

Already been taken.

Yes. That's true. That's true. Any construction activity in Florida? I know you're construction loans were down a little bit, but are you any signs of life in that and do you have any appetite for that kind of business?

We've not done anything that I'm aware of. I can't think of anything that we have necessarily in the construction site. Not seeing a whole lot going on.

Well, I'm seeing some two-by-fours go up, though. I'm seeing some home construction and some two-by-fours in and around the Keys. That may be a flash in the pan, but we're not engaging in any large active construction development. And probably not going to. We just did a big loan down there at $25 million. I think I told you about it. It was a completed construction project that the guys bought. Well worth the money and we financed the project for them. It's just spotty, but there's good business out there. You've just got to hunt for it and you'll find one here and there that makes sense.

Okay. Just two more. One small one. Curious how the Vision loans have performed versus your expectations and have you had to put anything back there? Do you think you got all the first time?

I think Kevin had put back $160,000 to date, and we have about probably $2 million maybe laying out there that he's going to probably put back in the next period of time, both combined Alabama and Florida. He thinks that he may put back the whole 7.5 and he may not. He doesn't know for sure, yet. But thus far, they've actually performed pretty good. We had $160,000 loan come up and we sent back to them and they paid us. But when you see that Alabama past-due on those sheets, I think that out to them, isn't it Brian? That shows the complete analysis that, that's not out? There's some Alabama out there that's past due and that's all put-back stuff to go and I guess that will go. Kevin, do you got any anticipation when you're going to put this stuff?

Yes. There will be about $2 million to $3 million put-back within the next couple of weeks and then we have to wrap it up in mid-August. It is likely that we will use the entire 7.5 just to get rid of some of the exposure. Some of that, probably half of that number will still be performing, but has significant amount of exposure to it. More than is covered by the discount that we got. We'll probably utilize the full 7.5.

Okay.

Between now and the in and the end of third quarter.

Okay. Good. Johnny, just one other question. On M&A, I think the theme maybe 12 months ago was all about credit and you were buying the failed banks and doing the carve outs like Vision, but has the theme changed at all in terms of the types of potential sellers you've seen right now? Is it more fatigue in expense and rates or is it still all about credit in terms of the companies that you're seeing wave the flag and want to sell?

It's credit, primarily. One of the bankers has presented us with some opportunities, he thinks, with some good banks in Florida that we probably will try to get around to at some point in time to look at, but it's primarily credit. Everything we're looking at right now I'd have to say is credit. The big one we were on that we didn't get, we couldn't get, the fear was it was about $1 billion bank. We couldn't get together or were unable to get together because they thought our marks would be more drastic than their marks, and I'm not sure he wanted the world to know his marks would be that much different than ours.

The one we're on now, the little one is about $100 million of loan similar to the Vision deal. Could be a nice trade if we can put it together. If we can get together on the value of those branches. There's lots of factors there. The other deal that just came to a hiccup here, we're down to one hiccup and we get that hiccup resolved, I think we'll go forward with that transaction and it should muscle us up in a market that we are already in and it should be a nice trade for us.

Okay. Thanks for the help, guys. Good job.

Derek Hewett, KBW.

Good quarter. Johnny, could you maybe comment on the FDIC front and what you guys are seeing from potentially acquiring additional failed banks at this point? Are you just looking at traditional M&A or are there some FDIC deals that pop up from time to time that you guys are -- ?

It's both. You know how disciplined we are. We're not going to do stupid -- hopefully, we may do one, but hopefully we won't do a stupid deal. The deal we're on is an M&A deal, just a straight-up complicated M&A deal. But we just got through bidding on an assisted deal, small assisted deal. Last week?

Last week.

They're still there and believe me, there's more coming. At least, there should be more coming, more of those deals coming. We're all over the board. We bid on, but we didn't get the [Pelocha] deal. We bid on it, but it wasn't a market that really enticed us. But we bid on it. We'll bid. We'll send the bid in and we'll look at it. It's about the same as it was, just there's more market opportunities and less assisted deals.

Yes. And less FDIC deals, definitely.

Okay. Great. Just circling back to your earlier comments on the net interest margin for the full year, were you expecting it's not going to drop below 4.5% for the full year? Or is that on, it won't drop by more than 4.5% on a quarterly basis, but it could.

I think 4.5% for the year. I would really be disappointed if, with the repricing opportunities that are in front of us for the next 90 days, and paying off that 680 on the trust preferred, I'm not sure we can't continue to lower our cost of funds here for a little bit.

Really should be better than that.

It could be. Randy Mayor said it was going to go down for years and it went up and now he's saying it might be able to hold its own, so I'm concerned it might go down. (laughter) I think we'll be fine. I thought I missed something. I thought our big repricing opportunity was October this year and it's between now and October is the big repricing opportunity and there's lots of money out there.

It could be a significant amount of money. We just didn't bust those CDs, Derek, when we first bought the failed banks. We left them in place. We busted some, but we didn't bust these and it was a big amount of money. We probably should have gone ahead and busted them.

Okay. Great. Thank you very much.

Will Waller, M3 funds.

On the construction and land development portfolio of $269 million, how much of that is vertical construction versus how much is land?

I don't have that number available right now, but I can certainly get it for you.

Okay. What geographic areas are those loans in?

They'll be throughout our footprints, both Arkansas and Florida.

Okay.

Alabama -- they'll be throughout that footprint.

How much of that's been originated in the last two years?

I would say it's a small percentage. We haven't done a ton of construction financing, because there hasn't been that much out there. I don't have a number for you, but I can certainly get that number, too.

I'm going to tell you that probably, I'm thinking about a large $40 million project we did here in Conway, that's probably --

That's moved out. That's moved over. It's permanent.

Yes, well that's been going on for about three years and pulling up over a period of time. We really haven't done much; very little, very little in the last three years. I didn't really care if I ever saw another acquisition develop in a loan because we got our tails kicked a few times on those. I didn't care if we ever saw another one. It'd have been hard to get us to make one.

Okay. That makes sense. What were most of the terms when you originated those loans? Were they 18 months or 36 months or when would we expect to see the rest of those loans roll off?

It would depend on whether it was land or whether it was construction. If it was construction, it could be 18 to 24 months. If it's land, it could be 36 before you really expected to see much decline in it. It would depend on the type of project that it was.

I'm trying to think in land where we got a bunch of land developments. I don't know where that is. Just off the cuff, I can't remember. I know we've got some residential developments out there, but I can't even come up with one.

Well, some of that land may be the Cabot stuff that we had, but those are selling off pretty quick.

That might be some of that. There's just not a lot of it. To tell you the truth, Will, I'm going to look at that myself. I'm get in there and look and see what's left in there.

Is much of that portfolio an extension?

No. I understand what you're saying. You're thinking if we hadn't originated an acquisition development loan the last two or three years, are these just evergreens and we just keep extending them out and extending them out and the answer to that is no. I apologize if, Kevin, we need to get with Will and give him that information.

We can certainly do that.

We don't have any projects that are stalled. We don't have any failed projects. If that's what you're looking for, that doesn't exist in this portfolio. We don't have any of those. And that's what it looks like. That's not correct. There is none.

Great quarter, fellows.

Thank you. I appreciate it. We were pleased with it. I think we made too much money. The stock was off 5%. Amy?

We show no further questions at this time.

I just want to thank you all for joining us today. I think you can see where the Company's headed. With the strong pipeline deals playing, we've got several deals out there working, continuing to work on ROA of Florida. Arkansas is even improving it's ROA. We've got some opportunities on the liability side. As Donna's team gets busy on the expense side in Florida we'll see where that comes. We think this year's going to be the best year ever for us.

When you start looking, it was a year ago when I told you I could see $80 million and now I see $100 million. I don't see the $110 million, but I see another deal out there or two, and the other deal or two gets us to the $110 million. That gets us to our $2.50 a share. That's the new goal. Looks like the bonus has been hit for the $2 share run rate for the Company for the people and the next step is $2.50. I do not see $3, but I do see $2.50. Again, thanks for your support and we'll be in touch and talk to you in 90 days.

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