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Home BancShares, Inc. (NASDAQ:HOMB)

F4Q08 Earnings Call

January 15, 2009 2:00 pm ET

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 – Director of Financial Reporting

Analysts

Tony Montemurro – Howe Barnes Hoefer & Arnett

Jon Arfstrom - RBC Capital Markets

Matt Olney - Stephens, Inc.

Brian Martin – Howe Barnes Hoefer & Arnett

[Joe Finnick] – Sandler O’Neil

Analyst for Steve Covington – Stieven Capital

Brian Hagler – Kennedy Capital

Jordan Hymowitz – Philadelphia Financial

Charles Ernst – Sandler O’Neil

Operator

Welcome to the Home BancShare Incorporated fourth 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 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 the cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10K filed with the SEC in March of 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 the fourth quarter earnings report for Home Bancshares. During the third quarter conference call I said that the fourth quarter of ’08 and the first quarter of ’09 would be a little noisy but I didn’t expect them to be quite this noisy and the noise in Florida was more than we thought and warned about.

We’re known for having a straightforward style, no BS when dealing with asset quality. If a problem exists, we deal with it. It is what it is good or bad. Our Arkansas asset quality which is 85% of our total loan portfolio has been excellent. There have been only a small number of problem credits in Arkansas.

Our problem has been Florida which represents only 15% of our total loan portfolio. The problems resulted from a slowdown in economic activities in the Florida market. Our company has dedicated strong resources to both the loan and loan review process in Florida. Effective December the 5th Marine was merged in to Conway Centennial Bank and the Florida assets are now on the watch of one of our star CEO’s Randy Sims and Kevin has assumed the Chief Lending Position at Marine.

Ron Strother, our Chief Operating Officer attends all loan committees either by phone or in person. In addition, the head of our loan review for Arkansas for nine and a half years [Marissa Langford] has moved to Florida and will be instrumental in overseeing all loans in the Florida region. A former bank regulator herself, she takes no prisoners.

We reported a $9.4 million loss for the quarter and we ought to talk about the components of it. I think they’re in the press release but maybe I can add a little color to these components. Number one, we took a $20 million provision for loan loss. We charged off about $15.4 million which nearly all of that came from Florida, the charge offs but, we replenished the loan loss reserves with about $20 million and Ron will add a lot more color on that in a little bit. But, we took loan loss reserves to a record 2.06%.

We had discussed our merger expenses that would run $2 to $3 million. We took about $1.8 million worth of merger expenses during the quarter and we had OREO write offs of $2.4 million. All but $150,000 of that was Florida again. We had trust write off of $3,860,000. If you remember in the second quarter we wrote about $2 million on trust. I told you then that I thought about writing it all off but I think it may recover in part or in whole within the next period of time.

But, as we’ve seen more defaults and more problems with that we decided to write it completely off so there is no more and you won’t see more write offs on it. It might recover partially in 48 to 60 months but it is gone from our books. Actually, I think they are on the books at about $1. The last item was a pre-tax gain of $448,000 resulting from our ownership in Arkansas Bankers bank stock.

That’s pretty well the components of what made the quarter. The strength of our balance sheet afforded us the ability to take this head on, rather than on a piece meal fashion over several quarters. We built strong capital reserves for tough economic times such as these and we dealt with our problems head on.

Without the noise for the fourth quarter the actual core earnings would have been $6.8 million or $0.34 a share. That would have been a tick above expectations. We’ve talked about these items that made up the fourth quarter loss so as we go to the operating highlights I want to deal with just the core earnings basis so it’s not confusing. These financial highlights will be on a core basis.

Net income was $6.8 million versus $5.4 million last year, up $1.4 million and in fourth quarter ’07 we earned $0.28 versus the fourth quarter of ’08 $0.34, would have, up $0.06 a pretty nice increase. I think the street was looking for $0.31 or $0.32. Cash earnings core up likewise $1.4 million to $7.1 million and core diluted EPS would be up $0.05 to $0.35. Link quarter 9/30/08 $6.6 million, 12/31/08 $6.8 million so we’re up $253,000 for the quarter on net income on a core basis. Diluted EPS likewise third quarter of ’08 it was $0.32 and the fourth quarter of ’08 would have been $0.34 up $0.02.

Cash earnings core $7.1 million, that’s up $253,000 likewise and cash diluted EPS at core would be up $0.01. Net interest income year-over-year was up $3.8 million to $21.6 million and non-interest income was up $912,000 year-over-year to $7.6 from $6.7. Non-interest expense was up $2.7 million to $18.3 million and that’s primarily a result of the Centennial acquisition. Net interest margin increased nicely from 361 to 378, up 17 basis points.

On a link quarter basis, net interest income was off about $230,000 from $21.9 to $21.6 and non interest income core was down from $7.8 to $7.6, about $200,000 while non-interest expense continued to drop from $18.5 to $18.3 down about $200,000. Net interest margin on a link quarter basis was dropped only 4 basis points from 382 to 378 in spite of the fact that we had 125 basis points drop in the fourth quarter.

Return on assets on a core basis last year this time was .94 and this year would be 1.04 while cash ROA 1.01 last year and improved to 1.10 this year. Cash tangible ROE for the fourth quarter was 12.04, last year this time 10.98 and efficiency ratio last year 60.54 and this year down to 59.8 to a drop of 72 basis points. On a link quarter basis September of ’08 we were 1% ROA core and 12/31 1.04. Cash ROA for the fourth quarter was 1.10, third quarter 1.07, up three basis points.

Cash tangible ROE fourth quarter of ’08 12.04, third quarter of ’08 11.72, 32 basis points, a nice improvement. Efficiency ratio ticked up a little bit from 59.25 in the third quarter to 59.82 in the fourth quarter and that was up 57 basis points but still below our 60 goal. Loans year-over-year grew $349 million, total assets up $288 million, total deposits $255 million and stockholders’ equity grew $30 million to $283 million.

Loans on a link quarter basis were actually down $11.7 million and Ron will add a little more color to that in a few minutes. Total deposits were down $65.2 million. We just didn’t get involved in the game. We’ve got a competitor who is a major regional competitor that is running the price of money up and we’re just not involved in it. We’re keeping our core customers competitive to marketplace and we’re not chasing these silly rates up here.

As a matter of fact, and Randy will talk more about it, we’ve had a good opportunity on federal home loan borrowings and I think we even picked up some decent broker deposits funds. They are cheaper than what these rates are. Stockholders’ equity dropped $8 million as the result of the loss and loan to deposit ratio kicked up 300 basis points.

Allowance for loan loss reserves, this time last year we had 1.83% and September of ’08 1.85% and December of ’08 we raised that as we made loan loss provisions to 2.06% which is a record for us. It is the highest loan loss provision we’ve ever had. Allowance to non-performing loans coverage dropped from September of ’08 third quarter 226 to 135 at December 31st and non-performing loans to loans increased from .82 at September ’08 to 1.53 at December 31. Non-performing assets to assets likewise increased from 1.11 on the September quarter to $1.42 on the December quarter.

Branch wise we opened Morrilton, Arkansas branch and Cabot, Arkansas branch during the year and we have a branch in Heber Springs pending. That’s the branch activity. At this point in time I’m going to turn it over to Ron for a little cover on our loans.

Ron W. Strother

As John indicated we saw a decrease in total loans outstanding of $11.7 million at quarter end. However, it should be noted that we charged off $15 million in credit in Q4 ’08 making it basically a breakeven quarter on volume. I’ll comment in a moment on some bright spots on the horizon that should help the volume in the future.

Let me turn to mix; due to the seasonal decrease in agri credit as expected, there was a very slight change in our mix. Real estate loans went up about 80 basis points, C&I remained flat at 13%, agri went down the same 80 BP that real estate went up. Just a second on asset quality, our preannounced year-end results certainly focused on the asset quality issues that Johnny has already touched on led by an increase in non-performers, charge offs, additional provisioning and OREO right downs, management took an aggressive look at the loan portfolio and adjusted accordingly.

This deep look resulted in not only charging off $15 million against non-performing loans, 91% of which was in Florida but it also included establishing specific new reserves of $10 million on about $34 million of performing loans. We believe that by recognizing these losses and reserves now it allows management to work through these anemic credits at more reasonable market prices. This allows us the opportunity to hold some very good properties particularly in Florida until the market turns around.

As this economic storm blows through, we expect the skies to clear return to more normal times and we are now well positioned. Let me move away from the unhappy stuff and talk about some happy things that’s on the horizon for Home BancShares and this is my Chamber of Commerce speech if you will.

I mentioned earlier that Home continues to be blessed with an in migration of stellar companies in various markets. Central Arkansas has attracted several base sector employers over the last couple of years, most recently last week Caterpillar announced a $140 million plant to be located in North Little Rock Arkansas. This plant will employ 600 workers, it will assemble motor graters for the construction industry and ship them worldwide. This should be open in ’09.

Southwestern Energy announced the construction of a $24 million regional headquarters in Conway to house administrative functions in support of their federal shell operations. This facility will not only accommodate the existing 220 employees with a goal of employing 400 to 450 employees at this location just blocks north of Home’s headquarters.

We had previously announced Hewlett-Packard construction a call center in Conway with a goal of 1,200 jobs. As our friend David Smith at the Arkansas Democrat Gazette newspaper wrote on Tuesday, January 6th, overall about 170 companies including major operations of L&M Glass Fiber, Hewlett-Packard, Welspun, Mann Industries, Nordex and Southwestern Energy have announced plans in the past two years that will result in the creation of about 19,000 jobs and an investment of more than $2.7 billion in Central Arkansas.

John W. Allison

Good report Ron. Randy, why don’t you give us a little color on margin.

Randy E. Mayor

As Johnny mentioned, our net interest margin declined four basis points from the quarter from 382 to 378. However, the interest associated with the loans placed on non-accrual during the quarter accounted for about nine basis points of decline which means our margin would have actually increased slightly for the quarter.

The yield on interest earning assets dropped 24 basis points from 622 to 598 with the majority of the decline attributable to loans where the yield declined 30 basis points. Yield on interest bearing liabilities also declined 24 basis points from 275 to 251 of which the largest component was associated with interest bearing deposits and repurchase agreements.

The non-accrual interest combined with the fed rate cuts of 50 basis points at the end of October and another 75 in December continue to put pressure on loan yields. However, our banks were able to offset much of the pain by reducing the yield on interest bearing deposits by 28 basis points and the yield on repurchase agreements, many of which are indexed by 76 basis points. I do need to note that many of our deposit rates have bottomed out so to speak and any additional rate cuts would be expected to compress the margin in 2009.

I’d also like to mention that during the year 2008 we have been able to obtain FHLB advances with maturities greater than five years in the amount of approximately $50 million with the average rate of 2.95% and we hope that in the long run these will prove beneficial to the company. Kind of to wrap it up we continue to work hard to maintain our margin and the fourth quarter was no exception. We are holding the line on loan rates and working on and decreasing deposit rates to the extent possible.

John W. Allison

I think we’re ready for question and answers at this point in time.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tony Montemurro – Howe Barnes Hoefer & Arnett.

Tony Montemurro – Howe Barnes Hoefer & Arnett

I just want to get an idea of as we look at this up and coming year we talk about the loan growth aspect of your business and given the economy down there, some of the influxes you have, can you kind of just give me a little bit of a taste of what type of loan growth you are anticipating? Are you pulling things back because of the credit? Can you give us some indication how that is going to be direct?

Ron W. Strother

As we indicated with the folks that are coming in to town, our customers are observing that. We don’t see a lot of growth in retail, we think our housing will hold up extremely well. 600 workers at the plant out in Little Rock so those sectors we expect to do well. We don’t expect double digit growth by any stretch but we are still in the lending business and intend to make every good loan that we can.

John W. Allison

I think it depends on when the press gets off all the bad news all the time. I think it scared some folks out there. Interestingly enough, with these rates down on the mortgage side we’re seeing lots of refinances and we’re beginning to see new purchases come in so that’s certainly a plus. We think that could be a plus. It could stand up pretty strong for the year. If they continue to keep rates down, I was visiting with one of our mortgage people the other day and she said she had 20 mortgages to lock in at 4.5%.

They are bottom fishing. We’re beginning to see that happen. The rest of the loan demand actually has been pretty soft here lately. Fourth quarter would have been up a tick if we hadn’t had the charge offs but it’s really been a little soft. I think people are just running a little scared Tony.

Operator

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

Jon Arfstrom - RBC Capital Markets

A few questions here, the first one, you have a lot of capital especially relative to your peers and I guess the question is how do you intend to use it especially with the TARP money coming in? Do you plan on sitting tight or looking at acquisitions or other uses?

John W. Allison

We’re always looking for acquisitions that make sense and we’ll continue to look for acquisitions that make sense. There’s several plans in place on the deployment of the TARP money but we think that the loan demand will certainly be good enough to feed that. Ron, do you have any comment on that?

Ron W. Strother

You should know we’ve got lots of opportunity in some products in the Fayetteville Shale play with Southwestern Energy announcing John just last week that contrary to the industry, they’re going to spend about $1.5 billion in ’09 in Arkansas and drill upwards of 600 wells. We’re still seeing good demand there. So, almost back to Tony’s question, there are pockets here where we’ll be able to deploy this money. There’s a couple of other lines of business that we’re exploring right now that would utilize that at a good yield in the lending arena.

John W. Allison

We’re looking at one line of business from some of my past history that due to the credit situation has created some problems for some really first class companies and we’re taking a strong look at that business and I know and understand that business.

Jon Arfstrom - RBC Capital Markets

Would that be on balance sheet Johnny?

John W. Allison

That would be on balance sheet, yes sir.

Jon Arfstrom - RBC Capital Markets

In terms of the $34 million that you talked about, Ron in your prepared comments you said you had $10 million in reserves to put up against the $34 million in performing loans, same geography as the other loans that you were talking about?

Ron W. Strother

A little bit different mix. It’s about I think 44% Florida and those. Most of these are residentially related. I meant to make that comment earlier. We don’t have a lot of C&I issues so these are either single family projects that were going great guns and stalled a little bit. But, I would say 44% of that mix is Florida John and about 91% of the charge offs were Florida.

John W. Allison

You can understand why the mix would be different because we took such deep charges in Florida. We took deep charges there and as we had a not good quarter we went through every loan portfolio A to Z, every bank in Arkansas as well as every bank in Florida. There wasn’t as much left in Florida to specifically reserve for after we made the charges.

Ron W. Strother

But, we do have good underlying collateral John. These were charge downs and we got them where we think they need to be and with any recovery we think we are well positioned. We did not lose these assets, they are still out there.

John W. Allison

We’re told that we have picked up a $300,000 recovery today. We have the muscle to hold these assets, we think these assets will recover and we’ll hold these assets until we get the price that we want for them. This $300,000 asset today we’ve written it down to $1. So, hopefully there will be some recoveries out there.

Jon Arfstrom - RBC Capital Markets

Then Randy, you talked about or maybe Johnny you did, the regional competitor their deposit rates were so far about market. Can you just give us an idea of how far above the market they are?

John W. Allison

Well, they’ve been in the fours. They were up in the 4.5s and they pulled back to a little below four right now. Not only is it unreasonable but it’s [reaches]. They’ve been bidding the price of money up and we’ve let some money go. We lost about $1.5 million last week at a four rate. As Randy said we’ve been able to pick some federal home loan borrowings. The last federal home loan borrowing that we did we borrowed $10 million at 2.01 so we’re not going to go out and pay 4% for money when we have the opportunity to get money for less.

We actually didn’t need the cash, didn’t need the $10 million, that last $10 but when you have an opportunity to borrow longer than five year money at 2% we thought we ought to take it.

Operator

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

Matt Olney - Stephens, Inc.

As far as the charge off in Florida, can you give us an idea of whether it was several smaller loans, or one or two larger loans, or maybe some loans we had talked about before on the conference call?

John W. Allison

It is some of the loans we talked about in the conference call. It was some loans we had been watching and some of those are paying but we decided based on the real estate market in the state of Florida that we’d charge them down, as Ron said, so we’d get them down to a realistic price in the event we have to take them back. Some of those may heal up, we just renegotiated one of them, it was about a $4 million credit, he started paying again. We didn’t put it on performing, we left it on non-performing but he is paying.

Our biggest project down there was about a $15 million project and had divided it in to two locations and we charged about $7 million on that project. We’re in a position to sell it or we’re in a position for some recoveries. The rest of it was we just went through everything even down to some credits that we either charged at $10,000 or $20,000 or specifically reserved it at $10,000, $15,000 or $20,000; it was pretty deep.

Matt Olney - Stephens, Inc.

As far as the $34 million of loans that were identified 44% I believe in Florida, as far as the loans within that bucket in Arkansas can you give us an idea of geographies within Arkansas?

John W. Allison

They’re primarily Central Arkansas. They are Central Arkansas credits, I mean they are paying as agreed but when we look through that global cash flow of that customer and if he doesn’t sell something he could have some problems. So, we just went pretty deep in there. One project, in a good subdivision, we wrote the lots down to $14,700 a piece, that’s developed lots with roads in there in a good area in Arkansas. We put $1 million specific reserve on it, if we have to take that hit we’ve got it down to where we can deal with it. If we don’t have to take the hit it will come back as a recovery.

Matt Olney - Stephens, Inc.

Are the borrowers having potential problems in that market or other markets in Arkansas? You mentioned the guarantors, the projects themselves are doing well but potentially you look at their balance sheet and there could be some problems down the road. Down the road within the projects that you have or down the road with the borrower but with projects not at the bank?

Ron W. Strother

Let me put a little color on it I guess. These are predominately Central Arkansas credits. We didn’t lend out of area on these. They are residential related. Over 50% of the $9 million is residential so these are subdivisions where they may have looked phenomenal two or three years ago and too many lots might have come on the market and the borrowers might be struggling to make the payments.

Through an abundance of caution we look at these credits, looked at the absorption levels and said, “You know, if we had to sell them today here is the price the lots would be.” So, we took those write downs. These are not charge offs, we specifically reserved for these just in the event that the borrower can’t pay. But they are right here. We didn’t go out of area, they haven’t gone out of area, they are right in the middle of this populous boom if you will where these 19,000 jobs are being recreated. So, we’re not worried about the absorption over the long run.

Matt Olney - Stephens, Inc.

Ron, another question for you, the economic activity in Conway related to the Fayetteville Shale, you kind of gave us an update on that in your prepared remarks but are you seeing any projects that were planned a few months ago, are any projects being postponed, or delayed, or cancelled all together? Are you still seeing a flow through of pretty much all the projects that were planned being completed?

Ron W. Strother

They are being completed. HP has gone in to Little Rock in the [inaudible] Citibank Tower formerly, and they have had an aggressive training program getting their call centered people trained so that when this facility in Conway opens their core people are ready to go. So, HP has not pulled back at all. I understand the question you’re asking, a lot of folks are saying because of the slowdown there abandoning but no sir. Southwestern Energy is full speed ahead, so is HP, obviously Caterpillar is so we’re not seeing a pullback because of the current hiccup.

Matt Olney - Stephens, Inc.

So how do you reconcile that look at the slowdown in 4Q loan growth?

Ron W. Strother

These are massive base sector employers that get their money on a very broad basis and we’re not seeing other than the big boxes Matt close in some of these centers, we’re not seeing the kind of fall out that you’re seeing in other parts of the nation. Now, are there some borrowers who are fearful? Yes. But, we’re not seeing the reversal where they are laying folks off at this point.

John W. Allison

Matt, we’re not seeing the new projects come on stream but I don’t believe I’ve seen a project that had been announced that they’re not fulfilling that but we’re not seeing the new ones fire up and I think it’s primarily economic and the fear of what is going on out there in the world that’s slowing the new projects down.

Ron W. Strother

There’s a bit of a lack affect Matt and the way I sleep at night is these lots that we have, when these 1,200 people come on board at HP or the 600, or the rest, when they come on they will ber looking for housing so there is a bit of lag affect here.

Operator

Our next question will come from Brian Martin – Howe Barnes Hoefer & Arnett.

Brian Martin – Howe Barnes Hoefer & Arnett

Ron, I was wondering can you give just a little color, the breakdown and maybe you gave part of this already but, just kind of the breakout of the non-performing loans at quarter end just by segment? What’s real estate, what’s construction? It sounds like you said there’s not really anything in the C&I front so it’s just all construction and commercial real estate is that kind of what you’re saying there?

Ron W. Strother

Let me talk about Florida for a second on the ones that Brian we went ahead and non-accrued and took the charges. As Johnny said, there was one eight figure credit, we talked about it over and over again and we took a pretty substantial charge on that credit. There was another credit that was also residentially related that we took a six figure write down on and that’s it.

Everything else is below seven figures so it’s a number of credits but most of them, the vast preponderance of them are residentially related. Now, there might be restaurant or there might be some other type of operator, a hotel or motel but we’re not seeing that big of a problem in C&I, nor are we seeing that in Arkansas. The 44% that we talked about Florida, is still predominately residential and it will be absorbed over some period of time.

Brian Martin – Howe Barnes Hoefer & Arnett

How about you guys have a concentration, a small concentration of the hotel loans, those are all performing at this point, no issues there?

John W. Allison

Absolutely. We don’t have a past due hotel loan in the system, they are all performing well. We had a guest house in Key West Florida that we sold during the quarter, we loss about $250,000 on it but we sold it during the quarter. But, hotel/motels are doing fine.

Brian Martin – Howe Barnes Hoefer & Arnett

I know at one point we talked and you guys said a couple of credits that were backed by real estate up in Northwest Arkansas those are performing well at this point or not causing any problems?

Ron W. Strother

They are current and paying as agreed.

John W. Allison

No problems. We didn’t setup a specific on those, they are doing fine.

Brian Martin – Howe Barnes Hoefer & Arnett

Then lastly, the merger costs, I know you took a piece of it this quarter but you’re still expecting something to flow through in the first quarter, is that correct?

Randy E. Mayor

Yes, we still do expect, a lot of those expenses you can’t take until we actually incur, and we’ve got four more conversions coming so you’ll see some of that in the first quarter, some in the second quarter.

John W. Allison

We tried to accrue for all of that in the fourth quarter but we couldn’t do it.

Brian Martin – Howe Barnes Hoefer & Arnett

Lastly, Johnny you said in your remarks and maybe I just missed it, you talked about a new lender at Marine, I know the woman who went down there we had talked about that in the past but the new lender, was that something new or maybe I just didn’t hear what you said properly?

John W. Allison

Kevin Hester who is a senior lender for us for many years, has taken over the Chief Lending Position for Marine and spending his time between here and Marine presently. He’s been a horse with us for many years.

Brian Martin – Howe Barnes Hoefer & Arnett

So he was up in Arkansas and now he’s kind of just duel?

John W. Allison

That’s correct. As we merge Marine in he will be the Chief Lending Officer over Marine. And [Marissa Langford] who ran asset quality as I call it or loan review for many years for the company and has been with me for many years has moved to Florida, has been there some time and will be over special assets as well as loan review in that market.

Brian Martin – Howe Barnes Hoefer & Arnett

Lastly, since it seems like the issues in Florida were a little bit greater than you guys thought, at this point kind of taking this deep look at the loan portfolio are there credits of significant size still? You talked about a $15 million type of project, anything of significant size that is still down in the Florida market that is still performing at this point? Just to get a flavor of how many large credits that might still be down there that maybe at this point they’re still performing but a couple of quarters down the road might need to be revisited?

John W. Allison

Someone asked us the question, “Is there anything in hindsight that you didn’t reserve for in Florida either charge off or specific reserves at the end of the quarter?” And the answer to that is no.

Operator

Our next question comes from [Joe Finnick] – Sandler O’Neil.

[Joe Finnick] – Sandler O’Neil

Ron, what percentage of the $13 million increase in non-performing loans were Florida? Then secondly, I know we’ve talked generally about this but what’s the size of the Florida portfolio in terms of dollars and what’s the dollar amount of problem assets in Florida?

Ron W. Strother

The loans we put on non-accrual were predominately Florida.

Randy E. Mayor

$6.4 million of the increase was Florida loans.

[Joe Finnick] – Sandler O’Neil

And the rest was Arkansas?

Randy E. Mayor

That’s correct.

Ron W. Strother

The portfolio is I believe Brian is about $250 million, what is the size of that portfolio?

Brian S. Davis

About $270, it is little higher than that [inaudible] is about $320.

Ron W. Strother

The answer to the size of the portfolio is $320.

[Joe Finnick] – Sandler O’Neil

Then the dollar amount of problem assets in Florida?

Brian S. Davis

Overall the total is $16.5.

[Joe Finnick] – Sandler O’Neil

So $16.5 million in NPAs on a total balance of $320?

Brian S. Davis

The $16.5 is non-accruals, they also have 90 day plus which gets it to $17.3.

Ron W. Strother

And then you’ve got some OREO, I don’t know if you have OREO in that total or not.

Brian S. Davis

The OREO is $4.6 million.

Ron W. Strother

We’re still working through the OREO Joe and we wrote it down some. Johnny touched on it but we haven’t really dwelled on it here. We took some additional charges to other real estate owned due to the lack of offers on it. So, we adjusted OREO also which would be in your NPAs.

[Joe Finnick] – Sandler O’Neil

So the $16.5 is the problem loans, the $4.6 is the OREO?

Ron W. Strother

Is that correct Brian?

Brian S. Davis

That’s correct.

Operator

Our next question comes from Analyst for Steve Covington – Stieven Capital.

Analyst for Steve Covington – Stieven Capital

I was going to ask you a question on sort of deposit pricing, you said you had a competitor and I know you’re not going to say the name but is this a big competitor, multiregional or sort of just a $2 to $3 billion statewide? That’s number one and number two is, are you starting to see more rational pricing on the deposit side from let’s say the bankers in general? That’s really it just on deposit pricing?

John W. Allison

It is a large competitor that is causing the pricing problems. They have dropped a little bit, that was the first part. The second part of the question, somewhat, somewhat reasonable pricing return on the deposit side, it’s better. I mean it’s frustrating to these people as you can imagine who were in a 4% CD Joe and then suddenly they’re in a 2.25% CD. So, it is frustrating and it’s not easy to lower those rates but we’ve been successful in lowering those rates. When you can borrow federal home loan money at 2% for five years, you just really don’t want to step it up too much.

Analyst for Steve Covington – Stieven Capital

I was just trying to understand a little more on the deposit side.

John W. Allison

I tell you what, on the loan pricing side it’s gotten a lot more reasonable. The loan pricing side we have moved our rates up over the past 90 days and will continue to move our rates up. We have a minimum rate, New York Prime means nothing to us, we have our own prime, we deal with our own prime rate here and you can see the impact. When we’re only down four basis points and we had the non-performers here, actually it was a pretty good quarter outside the losses we had to take.

Analyst for Steve Covington – Stieven Capital

Johnny, when you guys are making new loans today, you sort of implied that there’s sort of a floor that you have, what type of floor are you really looking at?

John W. Allison

Well, it’s a six range floor and that’s for I1 customers with relationships and it prices up from there. That’s the floor, and we don’t do much five year stuff, we do two and three but we price it up. If they want to go five we’ll price it up.

Analyst for Steve Covington – Stieven Capital

And the six floor, Johnny is that an adjustable or is that fixed for a number of years?

John W. Allison

Well, the floor is six, the rate may be seven but the floor is six.

Operator

Our next question comes from Brian Hagler – Kennedy Capital.

Brian Hagler – Kennedy Capital

Ron, you mentioned earlier in your economic update that there’s going to be 19,000 jobs created, did you mention the timeframe on that or did I just miss it?

Ron W. Strother

Caterpillar will be open this year. They moved in to an existing building in North Little Rock and it’s $140 million project and they will be assembling this year. The Southwestern Energy will be online in 2010, they already have 220 jobs, the 400 to 450 will come on line in mid ’10. Some of the Conway guys will know where the HP project is.

John W. Allison

It’s under construction as we speak. The HP call center is being built and should be completed this year.

Ron W. Strother

Mann Industries, these are Indian companies and they make steel pipe for the steel pipe business for the shale and then we are big in to wind now, some Norwegian companies have come in and they’re making wind blades and those two, L&M Glass Fiber, those are in Little Rock, they went in to an existing facility out on I-30 so a lot of these jobs are in creation now.

John W. Allison

’09 and ’10 primarily.

Ron W. Strother

It should be together by ’10.

Brian Hagler – Kennedy Capital

My second question, Johnny you kind of kicked off the call talking about you expected some noise in the fourth quarter and the first quarter of ’09 and I was just wondering did a lot of the stuff that you maybe initially expected in the first quarter of ’09 get accelerated in to this quarter or do you maybe still expect a little noise just given the economic outlook at this point?

John W. Allison

I was only referring to the merger and acquisitions expenses. So, I think what you’re going to see is some continued merger and acquisition expenses I don’t anticipate you seeing anything like as we’ve taken this quarter. I hope that’s behind us this quarter.

Operator

Our next question comes from Jordan Hymowitz – Philadelphia Financial.

Jordan Hymowitz – Philadelphia Financial

A couple of things, first off the margin with the interest rate cuts that have just happened because I don’t think there can be any more technically, how much will [inaudible] do you expect it to impact your margin next quarter?

John W. Allison

How much do we expect the first quarter margin to be impacted, is that what you said Jordan?

Jordan Hymowitz – Philadelphia Financial

Right. In other words, if today’s interest rate held through the quarter which I’ve got to imagine they will, and everything else stays the same, how much will the margin be hurt?

Randy E. Mayor

That’s hard to say because it depends on what we’re able to offset on the deposit side.

Jordan Hymowitz – Philadelphia Financial

Well, let’s assume you can, I mean just from impact of the loan side?

Randy E. Mayor

I don’t know that I’ve got a number there. 42% of our loan portfolio is variable and 31% of it could still price down so you can kind of factor out the numbers there depending on what kind of assumption.

Jordan Hymowitz – Philadelphia Financial

31% you said?

Randy E. Mayor

Yes non [inaudible] so to speak.

Jordan Hymowitz – Philadelphia Financial

So that would be about 10 basis points then assuming that you couldn’t offset anything on the liabilities side?

Randy E. Mayor

Right, I think that calculates out about right.

Jordan Hymowitz – Philadelphia Financial

Second question is can you give an update on Alltel in Arkansas?

Ron W. Strother

Verizon took over, closed on January the 9th, the only people that were severed on January 9th were the top five people in the company. Verizon has had a succession of buses taking them to a local hotel and welcoming them to Verizon. We expect there to be a pretty substantial call center left here in Arkansas.

At one point somebody has suggested as many as 3,000 people may lose their jobs, I don’t know how many it’s going to be. It will be quite a number but one of the reasons I was highlight the in migration of base sector employers was that reason. Whomever is there is coming in at a wonderful time especially with HP up here in Conway. It’s almost identical to the skills set of the Alltel people.

Jordan Hymowitz – Philadelphia Financial

Final question is your charge offs in Arkansas were extremely low, can you quantify what parts they were? I mean you guys are not very exposed to Northwest Arkansas but if you would exclude Northwest Arkansas out of that picture would the charge off be even lower or it’s not really negligible?

John W. Allison

There were no charge offs in Northwest Arkansas. We had a builder in Little Rock that got in some problems and we wrote that off, wrote it down, charged off, I can’t even remember what the Arkansas charge offs were.

Ron W. Strother

I’m looking at them right here and it’s not even $1 million Jordan. So, I think the answer to your question is charge offs, zero in Northwest Arkansas, about $1 million in Central Arkansas with a preponderance in Florida, the balance in Florida.

Jordan Hymowitz – Philadelphia Financial

The very final question, for next year would you say do you think you could hit 10% loan growth or is that a little bit optimistic at this point?

John W. Allison

That’s the crystal ball with the economy and I can’t say that but, I would certainly hope we have the ability to hit 10% loan growth.

Operator

Our next question comes from Charles Ernst – Sandler O’Neil.

Charles Ernst – Sandler O’Neil

Can you just say for a couple of minutes about the natural gas drilling is there a number or dollar amount of natural gas where sort of the projects start to breakeven?

John W. Allison

We’re in the banking industry.

Charles Ernst – Sandler O’Neil

Right but, you must have heard people in the area talk about it?

John W. Allison

Well, the said $5 gas, they said if it breaks below $5 it’s not a proper for them and they’re not going to drill it. We haven’t seen any change from Southwestern Energy, we saw Chesapeake do their problem pull back some and they sold a piece to BP with that commitment that BP would drill them. There is probably some slowdown, I would assume there is probably some slowdown, we just hadn’t seen it.

Charles Ernst – Sandler O’Neil

Then just to confirm, you said that you wrote the trust down to $1, is that right?

John W. Allison

That’s correct.

Charles Ernst – Sandler O’Neil

Those were pools of trust preferreds not individual trust preferreds to banks?

John W. Allison

That’s correct, a pool of trust preferreds.

Charles Ernst – Sandler O’Neil

Was there a specific tranche that you guys owned within those pools?

Ron W. Strother

We’re on the bottom part of that tranche.

John W. Allison

It was 14 tranches and we had tranche 14.

Charles Ernst – Sandler O’Neil

I’m sorry if you said this but Northwest Arkansas how much of your loan portfolio is exposed there? I know it’s not huge but I just wanted to confirm?

John W. Allison

About $20 million.

Ron W. Strother

It’s very small. It has not changed.

Charles Ernst – Sandler O’Neil

The Florida exposure I know earlier you said $320 million, is that what is currently outstanding or is that commitments?

John W. Allison

That’s currently outstanding.

Ron W. Strother

Book balances.

Charles Ernst – Sandler O’Neil

Do you have an idea as to how much more the commitments are?

John W. Allison

I don’t have that but I can assure you - it may be $1 million, maybe.

Ron W. Strother

Most of the projects have been funded out and are fully complete awaiting sale or in some cases the customer has pulled back and chose not to fulfill the development. Very, very little left to fund on those projects.

John W. Allison

We may have some work in process there but it’s small percentage.

Charles Ernst – Sandler O’Neil

Can you just quantify what your exposure to hotels/motels?

John W. Allison

I think we’ve got about $120 million.

Operator

Our next question will come from Matt Olney – Stephens, Inc.

Matt Olney – Stephens, Inc.

Just a follow up question for Randy as far as the margins, Randy as you look at the margins month by month and second part, do you have a number additional Federal home loan bank capacity you can take on before you hit your limit?

Randy E. Mayor

Yes, we do look at it month by month. It was hard to compare with the December month but it has been declining a little bit of course with the rate cuts that have impacted the October and then the December. That has been dropping a little bit. I think our FHLB availability is probably somewhere around $180 million to $200 million still.

Matt Olney – Stephens, Inc.

What are your thoughts on approaching that limit? Is that something you wouldn’t mind using most all that for loan growth hypothetically in the next year or two or is there an issue there where you want to leave a good portion of that available for emergency reasons?

Randy E. Mayor

We would want to leave some of that available for the emergency or the unexpected that comes along but don’t have a problem taking some more of that down and as Johnny said broker deposit rates now are getting back in line. For a while there was a disconnect between FHLB and the brokerage. That may be something that we do look at a little closer to save some of the availability of the FHLB.

Matt Olney – Stephens, Inc.

As far as the margin by month, you said the biggest drop off was in the last month, in December, is that right?

Randy E. Mayor

Yes.

Matt Olney – Stephens, Inc.

And now is that because there was some kind of reversal with the non-accrual or is that just purely a deal of interest rates?

Randy E. Mayor

A lot of it is because of the non-accrual interest. Yes, it’s difficult to segregate it all out with the non-accrual fees and also with the rate decrease.

John W. Allison

Non-accrual piece, Matt, was about nine basis points.

Matt Olney – Stephens, Inc.

So when you back out the non-accruals you just back it out for one month or all three months?

Randy E. Mayor

When we’re talking about the nine that’s for the quarter.

John W. Allison

If we hadn’t had it you could add nine basis points to the margin.

Randy E. Mayor

When you do December it’s going to be a lot more because you’re just annualizing the one month.

Operator

That concludes today’s question-and-answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.

John W. Allison

Thank you. It was a pretty tough quarter for the company. As I said in the press release it’s abnormal for us to lose money and other than the first year of business that this company started it’s the first loss that we’ve had in some time. We ended up profitable for the year, we’re not real proud of it but it was what it was and we dealt with it.

People say is there any more and I guess there’s always some more out there, but I can assure you that we took a deep, hard look at our loan portfolio and we may have some more lot charge offs in the future but hopefully we’ll have some recoveries to offset those. We charted a course ten years ago using a conservative game plan and in this kind of financial crisis obviously it was the correct course. We appreciate your support and we’ll talk to you in 90 days. Thank you.

Operator

This does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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