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Executives

John W. Allison - Chairman of the Board, Chief Executive Officer

Ron W. Strother - President, Chief Operating Officer, Director

Randy E. Mayor - Chief Financial Officer, Treasurer

Brian S. Davis - Investor Relations Officer

Analysts

Jon Arfstrom - RBC Capital Markets

Matt Olney - Stephens, Inc.

Analyst for [Steve Covington] - Stephens Capital

[Brian Martin - Howie Burns]

Brian Hagler - Kennedy Capital

[Bob Whitehouse] - Private Investor

Home BancShares, Inc. (HOMB) Q3 2008 Earnings Call October 16, 2008 2:00 PM ET

Operator

Welcome to the Home BancShares, Inc. third quarter 2008 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’s participants will begin with prepared remarks and then entertain questions. (Operator Instructions)

The company’s participants in this call are John Allison, Chief Executive Officer, Ron Strother, Chief Operating Officer, Randy Mayor, Chief Financial Officer, and Brian Davis, Investor Relations Officer.

The company has asked me to remind everyone to refer to their cautionary notes regarding forward-looking statements. You will find this note on page 3 of their Form 10K filed with the SEC in March 2008.

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

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

John W. Allison

Welcome to Home BancShares third quarter earnings report.

In the second quarter we talked about the stressful financial times that we’re experiencing. Little did we know that the worst was in front of us and not behind us. History has been made. Our children and grandchildren will read about this crisis in their history books. We live at a time in history that will report the worst financial crisis since the great Depression. Credit markets remain dysfunctional and are leading to the demise of major financial players in the US and abroad.

I said on earlier calls that we need to keep our defense on the field, protect our strong capital base, be proactive on asset quality, and build reserves when appropriate and needed. People ask me, “What keeps you up at night?” My answer is, “Circumstances beyond our control.” We run good conservative well-capitalized banks. I tell our people, “Keep your chin strap buckled, keep your head down and run your banks the way you know how.” There’s no reason to worry about circumstances you can’t control and that is exactly what they’ve come to do. We call it stay the course.

Congratulations to the team for what was a good solid quarter in spite of extremely uncertain times. Third quarter was probably best described as flat to up in several areas; however we have some new high water marks that we’re pretty proud of.

On the revenue side both net interest income and noninterest income while up only slightly would be described by Randy Sims, the star CEO of our First State Bank in Conway, as the world record. They were the best in the company’s history. By the way, Sims ran a 184 last month with his Conway bank.

On the expense side, both interest expense and noninterest expense were both down slightly which resulted in the best efficiency ratio in the company’s history. We broke 60 on a GAAP basis for the first time ever. If you remember on a core basis last quarter, we broke 60 but the performance wasn’t quite as good as it was this quarter.

Couple that performance with the implementation phase of the efficiency study that will be completed in the third quarter of ’09 and we’re optimistic that we can reach our goal of mid-50s. Heads up. The fourth quarter of ’08 and the first quarter of ’09 will be a little noisy as we’ll spend $2 million to $3 million on the implementation phase. The best way to look at this is the fourth quarter of ’09 should be the strong indication of our ongoing run rate.

October of this year represents 10 years for our company since the formation of Home BancShares. My wife will tell you the 10th year without a paycheck, and that’s probably long enough. Ron told me that the government was buying banks, going to nationalize them and freeze the CEO’s salary at the present rate. Mine’ll be frozen at zero forever.

All jokes aside, if the compensation committee approves the nominal salary for me this week, you’ll probably see an 8K later this week or next week. I can assure you that the salary will not be excessive or in any way near the peer group. My only source of income over the past 10 years has been my Board fees, which I’ll continue to draw plus a salary.

Let’s go to the numbers. Year-over-year from Q3 ‘07 to Q3 ‘08 we increased income $1.3 million or 25.6% and EPS increased $0.04 to $0.32 or 14.3%. Cash earnings were up $1.4 million or 24.6% and EPS was up $0.05 on the cash side or 17.2%.

On a link quarter basis, which sometimes is more meaningful to see how we’re doing, net income was up $910,000 to $6.6 million from $5.7 million on Q2 of ’08. That’s up an annualized rate of 64%. Likewise EPS was up from the second quarter this year to third quarter from $0.28 to $0.32, up $0.04 or 56.8%. Cash earnings also up likewise $911,000 on an annualized rate of 61% to $6.8 million and cash diluted EPS was up $0.05 or 68.6%.

Net interest income Q3 ’07 versus Q3 ’08 was up $4.5 million from $17.3 million to $21.9 million which is a record net interest income as I said earlier, an annual change of 26%. We put in about $1.4 million in loan loss reserves this quarter versus $547,000 last year’s quarter. We just felt like it’s time to build loan loss reserves. Noninterest income was $7.8 million. That’s up $1.5 million from $6.3 million Q3 ’07 up 23% and that also was a record for the company.

Noninterest expense was $15.6 million to $18.5 million this year. That’s up $2.9 million or 18.6% primarily as a result of the Centennial acquisition. We increased net interest margin up to 3.82% from 3.55%, up 27 basis points year-over-year.

On a link quarter basis it’s pretty close. As I said, most of this is flat to up slightly. Net interest income in Q208 was $21.7 million and Q308 was $21.9 million, up $114,000 but still a record number for the company. The loan loss provision we put in $704,000 second quarter; we put in $1.4 million this quarter, up $735,000. Noninterest income was up slightly from $5.7 million to $7.8 million. That sounds pretty good. That’s $2.1 million but if you remember we had the trust write-down of $2.1 million. But in spite of that, the noninterest income was up by about $50,000 Q3 over Q2.

Noninterest expense, holding the line on expenses guys. Actual expenses were down by 19. Q208 shows 18.5 and Q308 shows 18.5 but actually they were down by about $19,000. Net interest margin dropped about 7 basis points from 389 to 382. Randy’s been calling for that. We’ll let him give you more color on that in a minute. He’s been calling for the past year I think, the last three quarters at least saying that the margin’s going to squeeze, so I guess he finally was right.

Return on assets year-over-year Q307 was 0.92% and we improved to 1% Q308. Cash ROA for the same period went from 0.99% up to 1.07% and cash tangible ROE improved from 11.16% last year to 11.72%. The efficiency ratio last year we were pretty proud of that 62.47 but we hit 59.25 this year and we’re very proud of that. That’s down 322 basis points.

On a link quarter basis, second quarter our ROA was 0.89%; third quarter 1%. Cash ROA second quarter 0.95%. Cash ROA third quarter 1.07%. Cash tangible ROE second quarter was 10.38 and we improved to 11.72 for the third quarter. The efficiency ratio dropped second quarter from 64.04 to 59.25. Actually if you remember, we had that $2 million trust write-off that was in there and we did break on a core basis we broke 60 efficiency ratio but not quite as good as we did the third quarter, so continued improvements.

Enjoy that for a while because as I said, those efficiency ratios are going to be messed up here for a little bit as we go through the B3 steps.

Loans year-over-year grew $408 million. About $192 million of that came from the Centennial acquisition and the balance was just pure organic growth, so it was up 26%. Total assets were up $383 million to $2.65 billion, up 16.9%. Total deposits were up $315 million to $1.91 billion or 19.7%. Stockholders’ equity grew another $45 million to $291 million from $246 million last year. Loans to deposits grew from 97.61 last year to 102.87 this year.

On a link quarter basis, you kind of get back to the flat and slightly up and Ron’ll put more color on the loans in a few minutes. Loans were up $17 million for the quarter. We had some pay-downs that he’ll be discussing with you. Total assets were up $39 million to $2.65 billion. Total deposits were up $11 million to $1.91 billion. Stockholder’s equity grew $3.2 million to a record $291 million. Loans to deposit remain flat at 102.

Allowance to loan loss reserves last year Q307 we had 1.84% reserved; second quarter of this year we went to 1.87%; and Q308 was 1.85%. Allowance to nonperforming loans was 226% Q308 versus 299% Q208. Nonperforming picked up a little bit as we expected and as we said they would from 0.63% to 0.82%. As we’ve given a range there, we’re still on the low end of the range of 0.6 to 2%. Nonperforming assets to assets ticked to 1.11% from 0.82% and past due loans over 30 days were 0.50%.

The company opened a new branch in Morrilton, a new branch in Cabot and as we said last time we may move on up into the Fayetteville Shale. So the company is looking at some opportunities in the Fayetteville Shale and you may see some news announcements on that in the next month or so.

That completes the majority of my remarks. I’m going to turn it over to Ron right now to give us a little update on the loans.

Ron W. Strother

As Johnny indicated, the loan volume while it looks at a slower pace at $17 million, we actually witnessed a higher-than-normal payoff ratio during the quarter. We had a very large multifamily loan that we’ve had on the books for a while of $24 million that went permanent nonrecourse as planned, and then we saw a couple of other projects totaling collectively about $11 million move out of the bank. So save these pay-downs, Q3 was actually a good quarter. The entire loan growth came from Central Arkansas.

Let me touch on mix for just a second. Once again we saw a relatively shift away from real estate. It was offset by increases at C&I and [agra]. In Q2 real estate was 82.2%; in Q3 it went down to 81.4%. C&I grew conversely from 12.2% to 13% and [agra] was up slightly from 1.7% to 2%. We had a nice funding for a municipal loan in the Central Arkansas market and we had energy related credits of $12.5 million.

Johnny’s already touched on asset quality. Let me give you a little bit of color on three points. Year-to-date we’ve added $6.9 million to the reserve for loan loss; we recovered $1.4 million; we have charged off $4.8 million; therefore our allowance for loan loss has increased $3.5 million at Q308 reflecting the 1.85 AAL to loans.

Net charge-offs were 1.4 for the quarter. About half of that came from the Florida market; about half of that came from the Centennial acquisition which is covered by the earn out. My last point, 78% of the $8 million increase in MPAs came from the Florida market as we continue to identify and work through the problem loan issues there.

John, that concludes my remarks.

John W. Allison

Ron, what would you think about the pipeline? Do you think the pipeline’s hanging pretty strong?

Ron W. Strother

Yes, it is. We continue in the Central Arkansas market particularly with the influx of business that having, we’re seeing good loan growth in Central Arkansas. Other than the [agra] paying down, [agra] was a little different. It funded up in the quarter and then paid down at the end of the quarter. So we do see the [agra] paying down. But C&I continues to be strong.

John W. Allison

I guess we need a round of applause for Randy Mayor. He’s been calling for margins to go down forever and he’s finally right on one. Randy, tell us what’s going on.

Randy E. Mayor

Not that it’s a good thing but I knew eventually I had to be right on that. As Johnny mentioned, I’ve been calling for margin compression or several quarters and this quarter it has come true.

The net interest margin declined 7 basis points; however the interest associated with loans placed on non-accrual during the quarter accounted for 6 of the 7 basis points drop. The yield on interest-earning assets dropped 22 basis points with the majority of the decline attributable to the loans. The yield on interest-bearing liabilities declined 19 basis points, of which the largest component was associated with the interest-bearing deposits. With the recent 50 basis point drop in rates, I do foresee additional pressure on the margin.

The floating rate loans which are about 41% of our portfolio now will reprice immediately, checking and savings account rates are at or near floors, and it will take some time for the CD portfolio to be able to reprice. I hate to say it again Johnny, but I expect the margin to compress again next quarter.

That’s all of my remarks.

John W. Allison

Ron, do you want to talk about loan rate and what we’re doing on loan rates and what we’re seeing? With General Electric paying 10% and IBM paying 7%, it looks like that we haven’t been paid properly for our risks in the past. Do you want to comment on what you’re seeing out there and what we’re doing?

Ron W. Strother

The general perception is when you see the Fed drop the rates and say prime goes to 4.5, the general perception is the rates are going down. We’re seeing better opportunity to strengthen our loan pricing because of the availability of money. When our loan officers come to committee we’re pushing those rates up, we’re getting fees and generally Randy I guess we’re trying to counteract as much as we can on the margin. We’re not having a lot of pushback from the customer base on getting good rates.

John W. Allison

Well, it’s a limited commodity everyone has today and you might as well make money with it.

The company is just staying the course. Sometimes market excess is that market corrections are not all bad. With the way we positioned this company with strong loan loss reserves, excess capital, improving earnings trends and excellent demographics for our primary market, we intend to stay the course and execute our proven plan. We hope that we are properly rewarded for being conservative and not yielding to the temptations of excesses.

Generally the strong survive and are allowed to take advantage of the market opportunities caused by disruptions. As we witnessed in the 80s a vast amount of assets changed hands as the market corrected. We are well positioned for that opportunity. To give an example of how well positioned we are, Tier 1 capital we have $157 million in excess Tier 1 capital and $168 million in excess leveraged capital and $96 million in excess risk-paid. We truly think we’re positioned for opportunities that may come our way.

We’re ready for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jon Arfstrom - RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Ron, when did the $24 million loan payoff? At what point in the quarter?

Ron W. Strother

We expected it right in the last month of the quarter and it came really almost in the last week. That funded permanent nonrecourse. The good news is we already have another loan to that borrower that has booked and we will be funding back up that money. It’s a construction project but it was right at the end of the quarter.

Jon Arfstrom - RBC Capital Markets

And you touched on the pipeline a bit but the first couple weeks of the quarter seem like you’re continuing to roll along at the traditional rate?

Ron W. Strother

Yes. Over the last 12 months we’ve booked a fairly substantial amount of credits that have advancing notes. Those have continued to fund up and therefore the volume will increase commensurately.

Jon Arfstrom - RBC Capital Markets

On asset quality, can you give us an idea of the components of what’s in the NPL and OREO category? And also maybe a little more color on the Florida project you talked about in your prepared comments?

Ron W. Strother

Regarding the Florida market, as I indicated 78% of the increase was there. It’s a particular project that we think is extremely well secured. There is an issue between some partners and we understand the monies to pay us in full are already in escrow. So we did not expect this loan to go nonperforming and it was quite a surprise. We were hoping to be able to announce on the call today that it had all been resolved. I was on the phone with the Florida loan committee this morning and we do expect that to cure itself fairly quickly.

John W. Allison

It came as a surprise at the end of the quarter where it called for a payoff and we thought that loan was paying off and they tried to short-sell us and tried to take a discount on us at the end of the quarter. We didn’t like that so we filed suit and it may cure itself up.

Jon Arfstrom - RBC Capital Markets

And then Ron, how about REO? How granular is that or is it just a couple projects?

Ron W. Strother

We have the one property that you’re familiar with up in the Upper Keys that we’re continuing to market and other related chattel personal property that we’re marketing. The rest would be single family in nature. It’s a few houses; only one large credit in all of that. But we’re attempting to push the REO out obviously as fast as we get it in.

Jon Arfstrom - RBC Capital Markets

If I heard you correctly, the charge-offs came from Florida and Centennial. Is that what you’re essentially saying without saying that the rest of the bank was extremely clean?

Ron W. Strother

Outstanding.

John W. Allison

Actually the Arkansas asset quality was really pristine. We’ve probably got a couple more quarters in Florida as we continue to deal with these credits. They’re not surprise credits to us so we’ve probably got a couple more quarters of those deals. We really hadn’t seen much lately; we’ve just seen very little coming out of Florida. We had a little nonperforming out of Arkansas. We had a builder in Little Rock that went upside down. We got that property back and I think we’ve sold about a third of it already.

Ron W. Strother

The other is moving to a contract.

Operator

Our next question comes from Matt Olney - Stephens, Inc.

Matt Olney - Stephens, Inc.

Congratulations on getting that efficiency ratio down. I know that’s been a long sitting bull for you guys. So that’s fantastic.

John W. Allison

We’re going to keep bringing it down too.

Matt Olney - Stephens, Inc.

I wanted to stay with the topic on the asset quality with the charge-offs in Florida. Have you guys been able to aggregate all the potential charge-offs you see, kind of look at a range of potential charge-offs coming from those Florida credits?

John W. Allison

I’ve been saying that we’re going to lose between $2 million and $8 million in that market before it’s all said and done. I still hold with that $2 million to $8 million before it’s all said and done. But we think we have the reserves for it. It hasn’t changed much. It really hasn’t changed much.

There was a little surprise credit as Ron talked about at the end of the quarter because we thought that was paid off because the money was in escrow to pay us off we understand. And we didn’t get a payoff on it. We’ll see how that one works out over the next period of time.

I think the next two quarters will really tell the tale in that market. I think we’ve seen most everything we’re going to see. We either know about it, think we’re going to have to deal with it, or we’ve already recognized it.

Ron W. Strother

We’re in the slow season in the Keys. Things generally come to life in January, February, March and April. That’s the “selling season” and we’re looking for the market to recover at that point.

Matt Olney - Stephens, Inc.

As far as writing down some of those REO, that’s something you get reappraised every quarter. Is it still on the previous quarters or how do you usually treat that?

Ron W. Strother

It depends on where it is in the collection pipeline Matt. If it’s still performing, generally we don’t. As soon as it goes nonperforming we will order a current fair market value appraisal, we’ll look at it and provide for it accordingly. We generally don’t take the write-down until and if it goes into OREO. At that point we’ll get another appraisal and then we will take it in as a percentage of that value.

John W. Allison

An example of that is we had a house down there we had [inaudible] on. The appraisal came in at about $2 million. We wrote it to $1.5 million.

Matt Olney - Stephens, Inc.

I wanted to ask Randy about the margin. Is the margin compression forecast purely a result of the 50 basis point cut or do you think we were heading downward in the fourth quarter even before we got the announcement of the cut last week?

Randy E. Mayor

I may be a little pessimistic but I think we were still headed downward a little bit even without the cut there because we have kind of come into the tail end of our year window so to speak on the repricing on the CD side. This may actually give us a little more room to reprice even lower on the CD side but I think it’s going to take a little time to catch up. As I mentioned 41% of our loans are floating and a percentage of those have floors on them, but we will see some drop in the other loans that don’t have the floors.

Matt Olney - Stephens, Inc.

As far as the tax rate Randy, it looks like my effective tax rate picked up a little bit. Are we still looking just to model 31% or should it be any higher than that?

Brian S. Davis

One of the things that happens with our effective tax rate has to do with the amount of income because every marginal dollar of income that we have comes in at 39.225%. So if you look at Q1 2008 we had a 33.1% effective tax rate but we made $7.3 million. And then Q208 we had a 31.1% effective tax rate but we had $5.6 million which brought it down. This quarter it’s back up to 32.5% and really the primary driver is the fact that all the new dollar of income comes in at 39.225%. If you kind of grow us $1 million, you’d need to grow the taxes by $392,000.

Matt Olney - Stephens, Inc.

As far as deposits, there are so many news articles out there about deposit movements from one bank to another bank, from a worse performing bank to a healthier bank. What are you guys seeing within your own depositors in terms of moving deposits around maybe from account to account or are you attracting deposits from other banks perhaps?

John W. Allison

We have started attracting deposits from other banks. Interestingly, Bob Birch who’s the CEO of Twin City last week saw money rolling in last week from some large regional and local banks for just actually safety. They wanted to be where they thought their money was safe.

We’re seeing people move around with CDs and different names as they do to protect themselves. There was a fear out there for a while and we didn’t match up some of our competitors were paying 4+ as you know and we didn’t match up with them. We let some of that money go. If they’re a core customer, we’d keep them and try to keep them competitive but if they weren’t a core customer, we let them go. That’s been our philosophy the whole time and we’ll continue with it.

Operator

Our next question comes from Analyst for [Steve Covington] - Stephens Capital.

Analyst for [Steve Covington] - Stephens Capital

Big picture question. Deposit rates are just staying sticky and way too high and we’re seeing deposit rates at 300 over treasury and it’s ridiculous. When do you think that’s going to start coming down and who is in your market holding things up?

John W. Allison

Regents has been the lead in this market. They came out with a pickem CD at 4+ and they pulled some money with that. That’s really been the primary leader in this region around here. The rest of the people, it’s pretty normal. We’re writing CDs in the 250, 260, 270 and a lot of money is starting to roll us. The money came into Bob Birch’s last week. They didn’t ask the rate. They just wanted it in our banks because they know the strength of the capital base of our company. They absolutely didn’t ask the rate. They just walked in and opened accounts.

Analyst for [Steve Covington] - Stephens Capital

Where were they coming from?

John W. Allison

They were coming from regional banks and local financial institutions. I’d rather not say the names.

Operator

Our next question comes from [Brian Martin - Howie Burns].

[Brian Martin - Howie Burns]

Johnny, you talked a little bit about the expenses being a little bit noisier the next two quarters. Can you give any thoughts as far as how we factor in that $2.5 million that sounds like it’s going to float through there the next two quarters? Is it more lopsided one quarter versus the other at this point?

John W. Allison

I think it’s probably going to be pretty equal. Randy?

Randy E. Mayor

Yes, it’s associated with all the mergers and stuff. It’s probably going to be pretty equal, maybe a little bit heavier fourth quarter than it will be first and second.

[Brian Martin - Howie Burns]

It’s going to go over three quarters or just the next two quarters?

Randy E. Mayor

Mainly two quarters. There may be a little trickle into the second quarter of ’09.

[Brian Martin - Howie Burns]

Stripping that out, the core expense where you guys have held the line the last two quarters, does that seem to be a realistic goal going forward as far as holding that level pretty close? Do you expect to see any material increases there or anything unusual on the expense side or just a pretty good core number to look at?

John W. Allison

I’m expecting it to come down.

[Brian Martin - Howie Burns]

I guess I’m saying outside of the cost savings you’re going to get out of the integration?

John W. Allison

It’s going to hold pretty tight. We’ve really got our foot on expenses and our expenses were a little too high and we’re pulling them down. I think our CEOs are doing a great job of that. I believe we can hold the line on expenses.

Randy E. Mayor

But keep in mind we won’t have everybody together until second or third quarter so you really won’t see what I would call and Johnny referred to in the opening as normalized run rate till fourth quarter of ’09.

[Brian Martin - Howie Burns]

Randy, do you have a fair amount of loans that are at their floors of those floating rate loans or is it only a handful at this point and still have room to go down?

Randy E. Mayor

About $807 million are floating and about $130 million of that $807 million are at floors.

[Brian Martin - Howie Burns]

If you guys have it, the construction book you talked about it last quarter being about $350 million. I wanted to see if you could quantify what of that was residential versus what was commercial? If you had the breakdown of Arkansas versus Florida?

Brian S. Davis

Total residential was 22.2% and total real estate was 81.4% so you can do the difference on that to get the commercial real estate. If you’re looking for the total real estate in Florida, I don’t have that percentage but total real estate was $285 million in Florida.

John W. Allison

Florida’s about 16%.

Ron W. Strother

One of the reasons the mix is changing to C&I and [agra] is we haven’t been funding any new construction loans. [Inaudible] more A&D if you will. So what you see out there is projects that are maturing out where there’s lots available for absorption but there are very, very few new bookings of A&D or single family construction of any magnitude. That’s why you see the mix change.

Operator

Our next question comes from Brian Hagler - Kennedy Capital.

Brian Hagler - Kennedy Capital

Two questions. One, I wanted to get your thoughts on the government capital program since companies like yourselves don’t appear to need the capital. I was wondering if you’d consider participating to potentially use it to do acquisitions.

And the second question is, I just wanted to get your thoughts on how much you think this reduces the potential to see some FDIC-assisted deals.

John W. Allison

I guess the jury’s still out. My opinion of it right now is that I don’t know but I’m of the belief that it’s not going to help us at this point. I’m of the belief that it may help the people who hadn’t operated in the fashion that we’ve operated in the past and that it may help them. I’m a little disappointed that we’re bailing out some of these people, or appear to be bailing out some of these people. How it affects the local community bank remains to be seen. From one aspect with the credit crunch, the way it happened, we’re seeing opportunities that we hadn’t seen in the past. We’re pushing up pricing here and one of our big banks broke a 4% margin for the month and hopefully we can get the rest of them there. When Randy says he’s counting margins to go down, I’m taking the contrarian view of that and I’m pushing rates up. I think we’ve got an opportunity, it’s kind of a two-edged sword, but I believe we’ve got an opportunity here to maybe push rates up to get some opportunities that we hadn’t had in the past. I believe maybe you’re right about the FDIC-assisted transactions. They’re going to save the big boys but are they going to save a $400 million community bank? I don’t know the answer to that and I hadn’t seen how that’s going to trickle down. But if they don’t, maybe they want to fund somebody like us to go clean up those messes. The money’s at 5% and we did a public offering two years ago and the cost of that public offering was about 10% total when you add it all together. So that’s not a bad rate and I think it remains at 5% for five years. Randy, is that right?

Randy E. Mayor

I believe so.

John W. Allison

Something like that, and then moves up from there. We’re looking at it and we’ll know more about that as time goes on. Ron, do you have any comment?

Ron W. Strother

The thing that’s interesting to me as I watch today as all of you guys do your earnings releases and your write-ups on it, it’s interesting to me that of the seven banks that they gave the $125 billion to, those guys did well and for a while there the regionals rallied. I think some of them went up 30%.

But the interesting part as they’re doing their earnings releases, they didn’t suspend OTTI or the FAS 157. So the marks that are being taken are taking a substantial amount of capital out of those banks. So on one hand they gave it to them. On the other hand, by the failure to suspend the mark-to-market it’s being taken away. I think there’s still going to be consolidation in the industry.

John W. Allison

If you think about it, this housing crisis is what’s led to all this it appears to me. But it’s just the manufactured housing business revisited from years ago when if you could follow the mirror, you could get a manufactured housing loan. That went upside down and those buyers who couldn’t buy a manufactured home were then able to buy a stick-built house as we lowered the standards in the early 2000s on Fannie and Freddie, and we’re paying the price today.

Operator

Our next question comes from Matthew Olney - Stephens, Inc.

Matthew Olney - Stephens, Inc.

Johnny, you made some comments on previous calls about some of the benefits of the Fayetteville Shale. What are you hearing from some of your customers recently given that the fall of commodity prices, the fall of equity prices at some of the larger companies in the area?

John W. Allison

We actually haven’t seen any fall off or any complaints. The water trucks are still running, the wells are still being drilled, we have been able on the C&I side to build about a new $15 million portfolio there thus far at pretty good rates and we’re pleased with that. So far so good. Motels are full. Warehouses are full. Things are still going well in this area. We have not seen a fall off. We’re watching for it because where natural gas prices are, but we haven’t seen it yet.

Operator

Our next question comes from [Bob Whitehouse] - Private Investor.

[Bob Whitehouse] - Private Investor

You talked about new depositors, new customers and you used Birch’s group as an example where people are leaving less secure institutions and coming to ours. Do we have a formal business plan put together to go after that segment of customers?

John W. Allison

Only from a marketing point of view. We’ve been running some strength ads talking about the excess capital and the strong loan loss reserves, the [fortress] balance sheet to let people know who has capital and who doesn’t have capital.

[Bob Whitehouse] - Private Investor

Yes, but the average Joe sometimes doesn’t understand those terms.

John W. Allison

I understand that. We’ve done a little better job than that. It talks about lots of different aspects. Ron?

Ron W. Strother

It’s really a two-edged sword. On the loan side, it’s appreciably different. When a bank changes, it gets bought, we get our lenders together and we go down that list of customers from that bank and we may even go after a loan officer in that bank to move those relationships. With that loan relationship so comes the deposits. They’re generally substantial deposits and in a lot of cases noninterest bearing.

So yes sir, we have very specific targeted marketing approaches when there’s any disruption in the market; when loan officers choose to leave or they’re let go. We will find out those portfolios and we will go after those customers.

[Bob Whitehouse] - Private Investor

It just appears to be pretty and obvious opportunity for growth.

Ron W. Strother

I agree.

Operator

Gentlemen, we see no further questions at this time. I’d like to conclude the question and answer session and turn the call back over to Mr. Allison for any closing remarks.

John W. Allison

In closing, I just want to say we believe we’ve positioned our company properly to take advantage of what market opportunities might come. Having the [fortress] balance sheet as we talked about the capital reserves and the strong management team, we believe we’re ready to face whatever the uncertain future is. As other banks continue to struggle to raise capital and build reserves, Home BancShares had the foresight to deal with these issues far in advance. We chartered a course 10 years ago using a conservative game plan and in this kind of financial crisis, obviously that was the correct course. Quite simply, we will stay the course.

We thank you for joining our call today and we’ll talk to you in 90 days.

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Source: Home BancShares, Inc. Q3 2008 Earnings Call Transcript
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