Home Bancshares, Inc. (HOMB) Q2 2012 Earnings Report, Transcript and Summary

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, as Amy said, is here with me today, and I just have a few comments. I am not going to go into numbers really. I’m going to let Randy Sims to get into numbers, but we’ve developed the reputation over the years of kind of telling like it is. If it's bad if we tell it; if it’s good if we tell it and we take action to deal with it. You’ve heard me make this statement to some other people, it is what it is. And what it is today is the best quarter in our company’s history. And I am just going to hit these high points, as I said, and Randy will cover the numbers. But we had record quarterly earnings, record interest income, record operating earnings, record core pre-tax pre-provision with a 2.67, and I am proud to say we talked last year about a run rate of about $80 million, and I thought we could get there if we’d 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 of that record efficiency ratio, we maintain 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%. An improved loan pipeline, careful and cautious about the loan side of it. We’re beginning to see a little more activity out there which you’ve heard me make the…

Thank you, Johnny. As you said, it was a very good second quarter. And 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 the balanced improvement in results. We continued to control our expenses, ending the quarter with 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 nonperforming 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. And 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 3 months ended June 30, 2012 compared to the same period of the previous year. In reporting this net -- record net income there are 3 transactions that I would like to mention. First of all, there was a $359,000 gain on the sale of bank property…

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 152 for Q1 to 153 for Q2. Having the Vision transaction in for the full quarter helped to contribute to these increases. Net interest income increased $2.6 million or 7.2% over last quarter. The net interest margin remained stable at 465. The earning asset yield declined 11 basis points from 544 to 533, mostly due to change in mix. The yield on loans remained steady at 652 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 and deposits with average time deposits declining $12.4 million while average non-interest-bearing deposits increased $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 were up, offset by a decline in 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. And with that, I will 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 a retained earnings. For Q2, 2012, our leveraged ratio was 11.1% compared to 11.5% at 3/31. Tier one was 15.8% compared to 15.0% at 3/31, and the total risk based capital was 17.0% compared to 16.3% at 3/31. Additionally, book value per common share was $17.64 compared to $17.11 at 3/31. Tangible book value per common share was $14.53 compared to $13.96 at 3/31 and the TCE ratio was 10.3% compared to 9.7% at 3/31. 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 nonperforming loans and assets. For these numbers and more information on asset quality, I will 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 am 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 for the second quarter reflect continued improvement in the asset quality metrics of the company. Our non-covered nonperforming asset ratio improved slightly from 1.22% to 1.19% as did our non-covered nonperforming 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 loan 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 nonperforming loans. Non-covered real estate loan remained leveled in the second quarter, and the mix continues to be heavily weighted toward Arkansas present time with 85% of the June 30, 2012 balance of $14.5 million being located here. Net charge-offs in the second quarter remain 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 loan opportunities than at any time during this credit cycle, but we are also seeing more low rate, long-term offer sheet 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 have 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 will now turn it back over to Johnny.

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

[Operator Instructions] And our first question comes from Michael Rose at Raymond James.

Wanted to get a little color around, 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. I mean given that your coverage ratios are so strong and asset quality continues to improve, I mean would you expect that you wouldn’t have to book a provision in future quarters if trends continue?

I will let Kevin talk about the exact charge-off and what he is seeing in the pool. But from the legacy portfolio, and he will discuss the covered portfolio, I don’t anticipate -- I guess something could come out of the blue, but we -- as I have said in the past, there are no changes at all. Actually when you look at the asset quality metrics that improved for the quarter, and don't forget that we had 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, so those will be put back. So don’t forget, we got $7.5 million worth of putbacks there. So actually the asset quality was a little better than it showed as a result of the put back. Kevin, do you want to talk about the charge and what's your pools look like?

Michael, the -- we look at those pools quarterly and we had a couple pools that were non-accrual pools from one of the original purchases that -- excuse me, FDIC acquisition that needed some impairment and we continue to look at those quarterly. 22 of the 26 pools actually have more higher credit mark percentage than they did the day that we acquired the bank. So 2 of those 4 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 the existing loan loss reserve, but we didn’t. We didn’t think it 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.

And then just switching to the margin, I think it was a little bit better than I would have expected. Can you kind of talk about the drivers on a go-forward where you can kind of mitigate the pressures that you are seeing?

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. You've got some investment on average and the cash accounts on average were up a little bit. The loans hold 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. So we think we have a little bit of room on the liability side, but we hope that margin will kind of remain in the ballpark of where it is at now.

And let me say this, we haven’t written a loan with a 4 in front of it. We’ve written a loan with a 5 in front of it, but we have written a long with a 4 in front of it and we take them one at a time. So we were able to maintain margin for the quarter. We are pretty pleased with that. I expect on the road and I told the market to expect and I believe this is reasonable to expect 450 or above for the year.

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

Can you guys talk about what you are seeing specifically in Arkansas in terms of loan demand? I know your competitor last week was very optimistic about loan growth prospects, but there weren’t much detail provided on pricing for the new loans coming on the book. So I guess just give us some color on what you are seeing specifically in Arkansas, guys, and specific terms you are 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 3s in Arkansas which we’re not going to do. I don’t know how you spell 3. So we saw some of that, but some of the other competitors are not acting that way. So we are seeing some silly stuff from here and there, but not it’s bad in Florida actually as it is in Arkansas. I guess Arkansas' economy has 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 3s. We saw some silly stuff in the 3s in 5-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 kind of other structure too?

No. It’s fixed -- it's fixed 5-year stuff and fixed 7-year stuff at low rates, and we are just not going to sell our future, we just never have. We could have. I mean we are sitting on $300 million in cash drawing 0.25, but it makes sense to put one out there at 4-something. We’re just not going to talk about that. It worked for us. We were able to hold our margin. We will continue to do that in the future and we’re not going to get silly.

Okay. And then also, in better times you guys have always maintained very strong reserves. You are at 245, as you pointed out. The allowance is 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 ration breach there?

Well, Joe, if you remember, in my past company, and even this company we have always run 150. So I think that as things improve and loan growth comes back, and let me say this, we have 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. And then lastly, just in terms of the breakout that you guys provide on loans this quarter on 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 acquisition and development into commercial real estate section, and I don’t know someone flipped the switch or 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. So we came back and scrubbed, and that was uh-oh on us, but we corrected it and got it moved over in the right basket. Some of that stuff have been in that basket for 1 year that was under construction that had been completed now. So that was an uh-oh on our part and that’s why you saw the big move.

The next question comes from David Bishop with Stifel, Nicolaus & Company.

You guys alluded to seeing some activity in Florida as well, maybe you can speak about what you are 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 am pleased with the Arkansas. I am pleased with Florida, what’s coming on there. We approved about a $7.5 million Key West loan yesterday. We approved -- what did we approve yesterday, total, Randy, maybe 212? Randy, 212?

Exactly. It was a good executive loan committee.

212 yesterday at one -- and 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 in Oklahoma City, that’s our big apartment builder start pulling -- that will start pulling up. It’s better now, where we have we were actually up through 60 days, the loans were up about $8 million in the period at 60 days. And we -- that's a huge payoff. One guy was a big customer, had a bunch of get and go stores and he sold them for cash to a public company, and that was a big payoff for us. So we actually had a pretty decent run in the second quarter on the loan side. We didn’t get them all closed, but optimistic, we will see. I mean one quarter doesn’t make a trend as you heard me say, and you can’t make it happen, it happens; if you make it happen, you get into trouble. So we will just let it run what it is.

Without the payoff, it could have been a different quarter.

Yes, it would have been a different quarter. We'd been up instead of down, real close.

And then circling back to the [indiscernible], looking at the CD cost, still it’s got a 1 in front of it, still some opportunities to reprice on the CD side?

I think we have got maybe as big of a repricing opportunity in the next 90 days as I have 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 our Florida -- especially our Florida banks where we are 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 the checking account or we’re letting CD go. It just it doesn't make any sense if we can't convert that customer to a Sentinel bank core customer to keep the CDs. So that structure program is also going throughout the system. So I think we are going to see some opportunity on the liability side.

The next question comes from Matt Olney at Stephens.

It sounds like you're getting some good traction as far as the loan growth initiative. I wanted to ask about on the expense side. I get the sense you think there is 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 Townsel [ph]. 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 7 -- 6 banks and the Vision acquisition, we have not implemented the efficiency study in Florida and I will 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’d beat that some time in the future.

Matt, we have gone and realized some -- as like in our branches, due to the Vision acquisition, we actually caused a couple last week. We will continue to look at our footprint, look for ways to have maybe lease improvement for savings. Besides just looking at 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 to 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 are some there and over the next 6 to 9 months, as she rolls out her program, we will see what we can ring out of there.

Okay. And then last, I want to ask about M&A. I think in your last conference call, Johnny, you kind of narrowed your list down of M&A targets to about 4 banks. Can you give us an update on as far as your M&A target list?

Yes. I thought I was going to be able to announce one today to you. It’s kind of been -- I have been out of town a little bit, it’s kind of been a roller coaster. It’s been on, it’s been off; it’s been on, it’s been off. I’d have to say I think it’s on right now. I am not ready to announce it, but of the 4, 1 of them we lost and it's gone, so we move to next and then we move to the 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 will probably happen in the next week. Randy Mayor, what do you -- are you are shaking head yes? Or are you not shaking your head at all? He says it’s been up and down so many times he is not sure but I think we are close, I think we are close on that deal. And then Kevin Hester has done due diligence on another deal, it’s a market transaction that has -- I don’t know if we can put it together yet or not, but has some similarities to the Vision deal. It could bring in around $100 million in loans and deposits and some branches in our footprint. So I haven’t seen his numbers yet, I don’t know if Randy Mayor’s run the pro forma on that yet, but we have -- we've signed an exclusive and done due diligence on it, and we are waiting on Kevin’s numbers to come back. The deal I thought we could announce we have already done due diligence a couple of times and we are short of a few hiccups, I think we are ready to move forward. So I think you will be seeing some stuff activities coming out of us here in a short period of time.

The next question comes from Kevin Reynolds at Wunderlich Securities.

Question for you, though, and it’s a little different track. I mean Matt answered lot of the questions I had there. But Johnny, you are the largest shareholder of your organization right now. You just put up your fifth straight record quarter and your stock is down over 5% today. Do you want to comment on that and maybe let us -- is there anything that you think maybe somebody on the street might be missing in your performance out there today?

I guess I am bum fuzzled [ph]. 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%. And 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 the 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.

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

Yes, it does. Does that mean that you guys might be stepping up [ph] buy back out here?

Well I'm certainly not afraid to do that. Let me say one thing. We have good capital, we maintain good capital. We have a trust preferred that is -- we are paying about 680, it’s about $15 million. We have notified the people or filled out the app. We are paying that off. We are pretty smart people, kind of like we were on the TARP, we are paying 680 on that trust preferred and we are drawing 0.25. So you can figure out the math. We will be looking more of 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? So we will be looking at those deals to get the cost funds down too. But we called that one, or notified them that we are going to pay it off. So that’s a nice little kick, it could be a couple of pennies for us. So things look -- stock's off 5%, I don’t have any idea, I don’t know where I've ever seen the future brighter.

The next question comes from Brian Martin at FIG Partners.

Johnny, those trucks [ph] you talked about, when do those -- when does that take effect? Is that a third quarter event?

It will be September, the $15 million. As quick as we can get it paid off. When I look at it -- [indiscernible] and I looked at it yesterday and I said, tomorrow. Get Brian Davis to pay him off tomorrow. Well we can pay him off till September 15, as quick as we can pay them off. And that will 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 are going to pay the 15 off first, we are going to -- we are very protective of our capital ratios. We are going to earn $15 million next quarter in that range, and we are paying off $15 million. So the capital ratios ought to remain about the same and then we may take a bite then and do the next $10 million, take a bite then and do the next. I think under Basel III after 13, you have to eliminate 10% a year. We’re just kind of getting out front on this deal because we don’t need the money and that’s expensive money. When we did it, 360 looked like a great rate. 360 doesn't look like a great rate today. So we’re just going to pay it off. We’re going get out in front. Now if rates start moving up on us, we may sit on it for a little bit. So we’ve got 40 million of it, some of it is at LIBOR plus 215? 315. So that we will be evaluating all of it.

Okay. How about just going to those pools for question? What were the pools that needed some, I guess, help this quarter? What type of pools were they specifically?

They were 2 non-accrual pools. One of them, they were made up of non-accrual loans the day that the bank failed.

Okay. It wasn’t specific to construction or commercial real estate or is it that broken up 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. I guess it can have a little bit everybody in it.

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

Okay. I got you. And Johnny, just the loans you talked about, kind of the pipeline being as good as where it’s at, I mean I guess what -- how optimistic are you in closing some of these versus just having the pipeline out there at this point, I guess is that, do you expect it to translate into...

They don’t make it to my level. When they get there to that committee level, that big committee level, when they get to that, I am pretty confident that 80, 90 -- I mean I wouldn't -- I didn't go through the effort not to close it, so I don’t know of anything that we lately that we committed to that hadn’t closed or is not going to close. So I won’t say a 100%, but I will say that I think it’s a high percentage.

Okay. All right. And how about from a -- I guess the drop in fee income this quarter, maybe Brian Davis or someone can just -- on the FDIC part, was there something to that with the provision that you put back up? Or I guess how do we think about that going forward, Brian?

No, that was not -- those 2 are not related. That drop in the fee income is related to the initial marks that were set when we had this acquisitions, and it’s basically the accretion of the net present value and as this FDIC indemnification asset gets smaller, it gets smaller. And I mean just to kind of give you some projects for numbers, it’s projected to go down for the next couple of quarters. I mean for example, next quarter it’s probably going to be in the 645 range, and 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 just get smaller and the net present value of it will just get less and less because you'll get closer to the end game.

Brian, you got the -- you got to get these failed banks up to stream, because it is significant, it is significant to see the reduction and accretion that’s coming in now versus last year, it’s a $1 million a quarter, or more. And I mean the first 2 years are pretty drastic and then it starts to level out somewhat. But this company has been able to continue produce good earnings while swallowing those reductions in accretion, which is telling me that the performance of the company is stepped up significantly both in Florida and Arkansas.

Okay, perfect. And just the last 2 things, the OREO that you guys have on the books, is there anything that’s in the pipeline to be sold or I guess you're ticked [ph] on is going to get resolved here in the near term or...

Brian, we continue to move things in and out. So there are things under contract all the time of significant size. I don’t know of anything of the 3 or 4 largest ones necessary, but we are continuing move things in and out and having a lot of active there.

We are selling lots of stuff. If you remember, I think the biggest piece to OREO we've got is in Northwest Arkansas, it’s 400 acres, and we got it on the books now and I think at about 3.6 and it’s got to be worth twice that. So as Northwest Arkansas heals up, we'll peel that out. But I'm not -- I mean I could sell it today at 360, but I am not willing to take that for it. So we are just going -- that’s one of them we just said we’re just going to put on the books and wait it out.

Okay. All right. And then maybe last one, just for Kevin. The -- Kevin, just if you have any color on where the classified assets were this quarter and what TDRs were, that’s all I had.

Classified dropped about $3 million or $4 million. I think you show maybe a 106 number, $106 million, that should be down in the $102 million range and TDRs totaled $49 million and performing out of that $42 million.

Our next question comes from Jon Arfstrom at RBC Capital Markets.

Just couple of follow ups. You talked earlier about the pipeline, but just curious, I don’t know if you would 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 are seeing an improvement, each of the Florida regions and each of the Arkansas regions.

And that's probably balanced -- it’s probably -- it’s probably about 50:50, probably about 50% coming out of Florida and about 50% coming out of Arkansas.

And when you say Florida, let’s don’t forget Alabama. We are seeing some growth there.

Yes, I am considering South Alabama in the Panhandle with the Florida.

We’re going to have to rename this, we’re going to come up with a creative name. Any construction activity in Florida? I know your construction loans were down a little bit, but are you seeing any signs of life in that and do you have any appetite for that kind of business?

We have not -- we have not done anything that I am aware of, don’t see any -- I can’t think of anything that we have necessarily in the construction side. Not seeing a whole lot going on.

Well, I am seeing some two-by-fours go up, though. I am seeing some home construction and some two-by-fours in and around the keys. Now that may be a flash in the pan, but we are not engaging in any large construction development, and probably not going to. We just did a big loan down there $25 million, I think I told you about. It was a completed construction project that the guys bought, well worth of money and we financed the project for them. So it’s just spotty, but there is a business out there, you just got to hunt for it and you will find one here and there that makes sense.

Okay. Just 2 more, 1 small one. Curious how the Vision loans have performed versus your expectations and have you had to put anything back there, or do you think you got it all the first time?

I think Kevin had put back $160,000 to date and we have about, I don’t know, probably about $2 million maybe laying out there that he is 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 have actually performed pretty good and we had a $160,000 loan come up and we sent it back to them and they paid us. And so when you see that Alabama past due on those sheets, I think it’s out to them, Brian, that shows the complete analysis that -- is that -- that's not out? There is some Alabama -- there's some Alabama out there that’s past due and that’s all put back stuff to go, I guess that will go. Kevin, when -- you got any anticipate when you're going to put that 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 and 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 and [indiscernible] than is covered by the discount that we got. So we will probably utilize the full 7.5 between now and the end of third quarter.

Okay. Good. And then 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 carved-outs like Vision. But has the theme changed at all in terms of the types of potential sellers you are seeing right now? Is it more fatigue and expense and rates? Or is it still all about credit in terms of the companies that you are seeing wave the flag you want to sell?

It’s credit primarily, one of the bankers has presented us with some opportunities that he thinks with some good banks in Florida that we probably -- I will try to get around to it some point in time to look at but if it’s primarily credit. Everything we are looking at right now, I would have to say is credit. The big one we are on, that we didn’t get -- we couldn't get -- the fear was -- it was about $1 billion-dollar bank, we couldn’t get together or we were unable to get together because they thought our marks would be drastic than their marks, and I am not sure he wanted the world to know his marks weren't -- would be that much different than ours. But the one we are 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 is lots of factors there. And the other deal, it just came to a hiccup here. We are down to one hiccup here and if we get that hiccup resolved, I think we will go forward with that transaction. And it should muscle us up in a market that we’re already in and should be a nice trade for us.

We’ll go on to our next question which is from Derek Hewett at KBW.

Johnny, could you maybe comment on the FDIC front and kind of 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 kind of pop up from time to time that you guys are looking at?

It’s both. You know how disciplined we are, we are not going to do stupid -- hopefully, we might do one, but hopefully won’t do a stupid deal. The deal we are on is an M&A deal, just a straight up, complicated M&A deal. But we bid, we just got through bidding on an assisted deal, small assisted deal last week? So they are still there. And believe me, there is more coming. So at least it should be more coming, more of those deals are coming. So we are kind of -- we are all over the board. We bid on, we didn’t get to block to deal. We bid on it but it wasn't a market that really enticed us but we bid on it. We will bid, we will send the bid in and we will look at it. But it’s about the same as it was, just there is more market opportunity and less assisted deals.

And less FDIC deals.

Okay. Great. And just kind of circling back to your earlier comments on the net interest margin for the full year, was that -- 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 and I would really be disappointed if -- with the repricing opportunities that are right in front of us for the next 90 days, I'd be -- and paying off that 680 on the trust preferred, I am not sure we can't continue to lower our cost of funds here for a little bit. And we're not...

Should be better than that.

It could be. Yes. I'm not going to tell you -- Randy Mayor said it was going to go down for years, and went up, now he is saying it might be able to hold its own, so I am concerned it might go down. No, I think we will be fine, I thought I missed something, I thought a big repricing opportunity was October this year, and it’s between now and October is the big repricing opportunity and there is 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, we didn’t bust these, and it was a big amount of money. We probably should have gone ahead and busted.

So our next question comes from Will Waller at 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. And then what geographic areas are those loans in?

They will be throughout our footprints, both Arkansas, Florida, Alabama, through that footprint.

How much of that has been originated in, say, over the last 2 years?

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

Will, I'm going to tell you that probably I am thinking about large $40 million project we did here in Conway. That’s probably...

That's true. That’s moved out. That's moved over in permanent.

Well, that’s been going on for about 3 years and pulling up over a period of time. We really haven’t done much, very little. Very little in the last 3 years. I didn’t really care if I ever saw another acquisition development loan because we got our tails kicked a few times on those. I didn’t care if we ever saw another. It’s been hard to get us to make one.

Okay. That makes sense. Were most of the terms -- 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?

That 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 expect to see much decline in it. So it would kind of depend on the type of project that it was.

Kevin, we don’t -- or we don’t have a -- do we have a -- I am trying to think of land where we got a bunch of land, land developments, I don’t know where that is. I don't -- just off the cuff, I can’t remember. I know we got some developments out there, some residential development, but I don’t -- I can’t come up with where that -- I can’t even come up with one.

Well, some of that land may be the Cabot, the stuff that we've had.

I know those are selling off pretty quick.

Yes. Well, but those were -- there might be some of it. There’s just not a lot of it. To tell you the truth, Will, I'm going to look at that myself. I'm going to get in there and look at what’s left in there.

Were much of that portfolio on extension?

No. I understand what you are saying. You are thinking if we haven't originated an acquisition development loan the last 2 or 3 years, are these just average range and we just keep extending them out and extending out, and the answer to that is no. So apologize. We will get -- Kevin, we need to get with Will and give him that information.

We certainly can do that.

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

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 is headed with a strong pipeline, deals playing, we got several deals out there working, continuing to work on ROA of Florida. Arkansas even improving its ROA. We got some opportunities on the liability side and as Donna’s team gets busy on the expense side in Florida, we will see where that comes. So we think this year is going to be the best year ever for us and 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 2 and the other deal or 2 gets us to the $110 million, that gets us to our $2.50 a share and that’s the new goal. Looks like the bonus has been hit for the $2 a 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. So again, thanks for your support and we will be in touch and talk to you in 90 days.

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