Home BancShares Q3 2007 Earnings Call Transcript

Oct.18.07 | About: Home BancShares, (HOMB)

Home BancShares Inc. (NASDAQ:HOMB)

Q3 2007 Earnings Call

October 18, 2007 2:00 pm ET

Executives

Brian Davis - Director of Financial Reporting

John Allison - Chief Executive Officer

Ron Strother - Chief Operating Officer

Randy Mayor - Chief Financial Officer

Analysts

Jon Arfstrom - RBC Capital Markets

Barry McCarver - Stephens Incorporated

David Scharf - FTN Midwest Securities

Operator

Greetings ladies and gentlemen, and welcome to the HomeBancShares, Incorporated Third Quarter 2007 Earnings Call. At this time, allparticipants are on a listen only mode [Operator Instructions]. As a reminder,this conference is being recorded.

It is now my pleasure to introduce your host. Mr. BrianDavis, Director of Financial Reporting for Home BancShares. Thank you Mr.Davis, you may begin.

Brian Davis

Thanks, Anthony. I want to welcome everybody to the HomeBancShares' Third Quarter Earnings Conference Call on the webcast. Here with metoday is John Allison, our CEO, Ron Strother, our Chief Operating Officer andRandy Mayor, our Chief Financial Officer.

The purpose of this call is to discuss the information anddata provided in our quarterly earnings release issued this morning.

We'll begin with our discussion with an overview from thegroup and then we'll entertain questions.

I want to remind everybody to refer to our cautionary noteregarding forward-looking statements, which was included on page three of ourForm 10-K, which was filed with the SEC this past March.

With that said, I'll turn the call over to John.

John Allison

Thank you, Brian. Good afternoon, ladies and gentlemen.Thank you for your interest in our company and we appreciate you joining ourThird Quarter Conference Call. I hope all of you have read our press release.We are very proud to report record Third Quarter earnings up 21.9% over theThird Quarter of last year.

For the first nine months of this year net income totaled$15.1 million, a 31.6% increase over $11.4 million that we did the first ninemonths of 2006. GAAP EPS for the first nine months of 2006 was $0.74 and GAAPEPS of the first nine months of 2007 was $0.86, up $0.12, and we are proud ofthat.

We pay a lot of attention, as I'm sure you investors do,to cash EPS and 2006 was $0.79 on the cash side and a record $0.90 on the 2007side.

The Third Quarter just really could not have gone anybetter. While enjoying record earnings the company had good strong loan growth,improved margins, improving asset quality and improving net interest income andwe'll elaborate more on that as we go.

After my remarks, we'll go to Ron Strother for someadditional color on the loan side, and let Ron bring you up to date on what weare seeing out there and how the mix is operating for us right now. And thenwe'll go do Randy Mayor for some color on the finance side and what's happeningwith the margin.

Let's go to the numbers. Net income was a record if $5.2million, up 21.9% year-over-year from 9/30/06 to 9/30/07 and earnings were up $0.05 a sharefrom $0.25 last year to $0.30 this year up $0.20.

On the cash side we had record earnings there also of $5.5million, up 20.6%, up $940,000, or $0.31 cash diluted EPS versus $0.26, also up$0.05.

On a linked-quarter basis, we earned $5.2 million for theQuarter up 13.1% and dilute EPS was up $0.01, 13.1% from $0.29 to $0.30. On thecash side, as I said, we earned $5.5 million versus $5.3 million on alinked-quarter basis, up $12.4 million and cash diluted EPS was up $0.01 or13.2%.

Net interest income for 9/30/07 versus 9/30/06 we earned $17.3 million on netinterest income versus $16.4 million up 5.4%. We put a little less in loan lossprovision for loan loss for this Quarter than we did a year ago, of about$100,000.

Non-interest income was up 34.4% year-over-year from $4.7million to $6.3 million up $1.6 million. While non-interest expense was up 9.6%as we continue to try to keep our foot on that non-interest expense.

Interest margin, even though we are fighting a prettytough market out there, year-over-year margins were down, only down from 357Basis Points to 355 Basis Points, down 2 Basis Points year-over-year.

On a linked-quarter basis, net interest income was up$575,000 or 13.6% and in the Second Quarter, we put about 680 in loss loan andin this Quarter we put 547 in loan loss, down about $130,000 million.

Non-interest income for this Quarter was $6.3 millionversus $6.6 million last Quarter, but if you remember we had two one time gainsprobably primarily resulted from the hurricane recovery in Florida in theSecond Quarter, core non-interest income was up.

Non-interest expense was $15.6 million versus $15.5million. It was an increase of $82,000, which primarily is made up ofadvertising and FDIC insurance. Advertising was up about $60 million and FDICinsurance was up about $30 million, as that continues to ramp up on everybodyover a period of time.

I think I told you that we felt like we were fully staffedbefore. First Quarter we had 574 full-time employees. As the end of the SecondQuarter we had 589 and at the end of the Third Quarter we have 575.

Randy will give you a little more color on the marginafter I finish my presentation. But for the linked-quarter basis we went from351 Basis Points to 355 Basis Points, so we improved margin by 4 Basis Pointsand we are proud of that.

ROA year-over-year was $0.83 in 2006 and $0.92 in 2007 up9 Basis Points. Cash ROA, likewise, from $0.90 to $0.99. We're pushing that to1%. We just haven't quite gotten there but we're getting awfully close to it.

Cash (inaudible) ROE year-over-year from 1061 Basis Pointsto 1116 Basis Points up 55 Basis Points, and year-over-year improvement inefficiency ratio went from 6372 Basis Points down to this year of 6247 BasisPoints, down 125 Basis Points.

On a linked-quarter basis, GAAP ROA remained flat, $0.92,$0.92, no change. In spite of the credit bubble we thought we had during theQuarter it turned out to be a pretty good quarter.

Cash ROA also remained flat $0.99 to $0.99 as our goalheads toward 1%, and we improved cash trends with ROE from 1114 Basis Pointsslightly to 1116 Basis Points.

Efficiency ratio dropped a little bit; about 48 BasisPoints from 6295 Basis Points to 6247 Basis Points as we continue to expand ourde novo branching and we'll talk more about that in a minute.

On the loan side, year-over-year we grew $173 million, upabout a little less than 13% from $1.39 million to $1.56 million. Total assetsgrew from $2.11 billion last year to $2.27 billion this year up $154 millionand deposits grew $41 million year-over-year from $1.56 million to $1.60million.

Big jump in shareholders equity, up $21 million from $225million last year to just short of $250 million in shareholders equity, $246.6million. Loan and deposit ratio continues to move in the direction we want itto run, up to 97.61%.

On a linked-quarter basis, pretty good quarter. Ron willtalk more about this, as I said, in a minute but we're up $35.4 million inloans for the Quarter. Total assets increased $27.8 million up 4.9% anddeposits, which is really a snapshot of those deposits was down $44 million, onthe average deposit side it was only down $4 million.

We had a large 1031 exchange that came in with about $10million that resulted in about a $12 million loan. We had about $12 million inschool funds that went out. So primarily, big customers and public funds movingaround at end of the Quarter.

Total stockholders equity on a linked-quarter basis jumped$8.2 million or 13.6%, and I talked to you about loan deposit ratio. We're notconcerned about the deposit side, as we have a little less than $100 millionrolling off in investment securities this year.

We have over $200 million in federal home loan borrowings,lines available, and if we don't get another deposit from a customer, we onlyhave $53 million in total brokerage deposits, and we could run that to $250million, if we needed to. So as we've said in the past, we've stayed out of thefray in these, we had a competitor run money up in 2006. We have got another onetrying to play out in that game right now, but I think that will go away beforetoo long.

On a loan loss reserve, let's talk about asset quality,which improves substantially for the Quarter. Reserve, September 30th of 2006was $1.87 million. It remained basically flat for this Quarter to $1.84million. Allowance to non-performing improved substantially. We had 417%coverage September last year and we're at 1,052% coverage to non-performingloans this year.

Non-performing loans to loans dropped from last year at$0.45 to $0.17. I think that's the best in the Company's history. Andnon-performing assets remained flat from $0.33 to $0.34.

Loans and leases past due 30 days, including past duenon-accrual loans and leases to total loans, was a record $0.48 down from $0.92a year ago, down 44 Basis Points.

On a linked-quarter basis at the end of the June Quarterof 2007 we were $1.84. We remained at $1.84 this Quarter. Allowance tonon-performing at the end of June, if you remember we had that large $11 millioncredit on there, our coverage was only 147%.

That is now risen to 1,052% coverage to non-performing.And non-performing loans to loans at the June Quarter were $1.25 and they'vebeen reduced, as I said, to a record low of $0.17. Non-performing assets toassets dropped from the June Quarter at $0.86 to $0.34.

Past dues at the June Quarter were $1.44 and past dues atthe end of the September Quarter just closed with $448. We finished the FirstQuarter with about $3,000 in recoveries versus charge-offs.

In the Second Quarter, we had about $0.5 million worth ofrecoveries versus charge-offs. For the first time we had some charge-offs wehad $23,000 worth of charge-off total in the Third Quarter.

We added $547,000 to the loan loss reserve bringing our totalloan loss reserve to $28,636,000. We've added over $2.5 million this year as wecontinue to build that loan loss reserve.

On the branch expansion we're opening Key West, Key Largo; we've opened in Quitman, Arkansas, which is a play into theFayetteville Shale market. We've opened two more new branches in Searcy,Arkansas as we like [ph] that market, moving even deeper into the FayettevilleShale play.

That will give us a total of three branches in Searcy. Andwe've opened our first branch in Bryant, Arkansas, that's part of the Little RockMSA that we have not had a branch in. Pending branches presently for 2007, Idon't know if these two will be completed, if they do, that with will give us8, we have 6 open at this time.

Morrilton, Arkansas which is another play in to theFayetteville Shale play; we’ll be opening in a grocery store sometime maybelater this year, and then we're under construction for a new one out by theGrey Stone Country Club in Cabot, Arkansas.

That concludes most of my prepared remarks right now. I'mgoing to turn it over to Ron Strother, who is our President and Chief OperatingOfficer; Ron will give us some color on our loans. Then Randy will talk aboutmargins and we'll go to Q&A. Ron, would you take it from there.

Ron Strother

Thank you, Johnny. As John indicated, Q307 was anothergood strong quarter for HBI in terms of loan growth. What you see in thefinancials, although it showed a $35 million increase for the Quarter, weactually had about $22 million in payoffs in just the last few days of Q3.

There's a substantial agricultural loan that we had. Ourborrower was successful in moving about $14 million to long-term non-recourse,and we had a C&I revolver that saw about $8 million to that credit relaxedon the very last day of the Quarter.

So we really had very, very good numbers, but it abated alittle bit in the last week. Our pipeline remained strong. Hopefully, Q4 willshow similar volume that we had in Q3.

Let me turn to the loan mix for just a second. We had alittle bit of movement in categories. Total real estate loans moved upslightly, about 30 BP leaving us at about 81.2% of the portfolio.

Within the real estate category, non-farm/non-residentialwas the winner. We had a couple of large projects. Johnny referenced one onsome tax deferred exchange money of about 12.

We had a healthcare opportunity at about $6.4 million. Wesaw a decrease in farmland, which was the long-term fixed rate loan.Interestingly, and something that we've been talking about lately, we'restarting to get opportunity in the one-to-fours parked in the bank portfolioone-to-four loans.

It moved up about $11 million in the Quarter as we seizedon the opportunity to book good, single-family credits.

That gives us this opportunity because of the disruptionin the subprime market, and that messes up the whole mortgage pipeline.Non-real estate categories were essentially unchanged for the Quarter.

Let me address one issue that is kind of a recurring themethat we've heard, and let me touch on our “exposure” in northwest Arkansas. We're pleased to announce thatour exposure in northwest Arkansas is defined to two credits.

They are very well secured. They have substantialguarantors committed to these loans with a loan portfolio of $1.56 billion at9/30, we have only $23 million in northwest Arkansas and we anticipate no weakness ineither of those credits.

John, do you want me to touch on the liquor store or doyou want to handle that?

John Allison

If you remember, we reported to you that we hadowner-occupied strip center with a liquor store in it in Florida, and I think we get possession ofthat hopefully through the court November 19th, is that correct? Go ahead, Ron,and report on that.

Ron Strother

Well, it's an interesting situation. We got 76,000 itemsof liquor, so, if you need Christmas gifts, let us know. We're going to have asale. We're going to have an auction down there, but the good news is the spacethat the liquor store occupied, 9,200 square feet, we have a lease in hand at 21.65a foot triple net.

The rest of the center is basically occupied. That willthrow off about 25,000 monthly. It will give us return of about 7.6%. We willthen offer the center for sale. At this point there's little or no lossanticipated in the credit, so we're very, very pleased.

You will have seen about $4.7 million move fromnon-performing loans over to non-performing assets, as Johnny indicated, as wetake it into REO. John, that concludes my remarks until the Q&A.

John Allison

Okay, Ron, thanks. Randy, why don't you give us a littlecolor on what's going on the finance side, margin, and what you're seeingthere.

Randy Mayor

As Johnny mentioned, on the margin we were up 4 BasisPoints for the Quarter and from an investor's perspective, a lot of people arewanting to know what the 50 Basis Point decline is going to have impact wise onour margin. It's a little bit early to tell that.

If you recall, last Quarter we were about a little over2%, negatively GAAP'ed. We've moved a little bit more negative direction, about4.5%, which would show that we're inclined to take advantage of the lower ratesof the rate decline.

However, that's a 12-month GAAP position that we'relooking at, and if we actually break it down and look at it quarter-by-quarter,we're actually going to be in a positive position over the next two quartersbefore that starts to turn and that would be expected.

As you see the maturities of time deposits will kind oflag what has basically happened to the variable rate loans, which have beenbasically immediately re-priced.

So, we do expect to have a little pressure on the marginfor the next couple of quarters before we hopefully see an impact to thepositive for us for the decline in rates of the 50 Basis Points.

John Allison

Randy, thank you. Anthony, that concludes our preparedremarks other than the summary, but Anthony, we'd be open for Q&A if youhave any questions.

Question-and-AnswerSession

Operator

Thank you; [Operator Instructions]. Our first questioncomes from the line of Jon Arfstrom from RBC Capital Markets. Please, stateyour question.

Jon Arfstrom - RBCCapital Markets

Thanks. Good afternoon, guys.

Brian Davis

Hey, Jon, how are you doing?

Jon Arfstrom - RBCCapital Markets

Doing well, thanks for the color, I've just got a coupleof questions. In your press release you talked about the easing of competitivepressures in 2007 as one of the aids to your loan growth.

Can you talk a little bit about what the environment islike today and whether or not it's changed over the last two or three months?

John Allison

I think the reference to the press release was the easingon the deposit side. On the liability side we're seeing a little of that. Isthat what you're referencing, Jon?

Jon Arfstrom - RBCCapital Markets

Yeah, it is. It says easing of competitive pressures, andit doesn't necessarily talk about liabilities or assets, and I'm just curiousif you could clarify that a bit?

John Allison

Yeah. Randy, you want to talk about the liabilities side?

Randy Mayor

Sure. As Johnny has mentioned several times, we've haddifferent competitors in the market running up very aggressive advertisingcampaigns for cost of funds and we've seen that, kind of, decline somewhat, andthen we have another competitor that will step in and do that again, butoverall we've seen some more, I would call it reasonableness, to the pricingthat's been in the market and also the incremental pricing that's there.

We have basically re-priced our portfolio. It's been abouta year and four months or a year-and-a-half since we started that process. Soincrementally, the pricing on our portfolio on the CDs and stuff is a littlebit less pressure than it had been in the past.

John Allison

Jon, I think that's continuing on and with the 50 BasisPoint drop we didn't see the competitors drop 50 Basis Points. We saw them droppart of the way, but I think that will be coming down before too much longer.

Jon Arfstrom - RBCCapital Markets

Okay. Ron, could you just comment on watch list trends,what that looks like.

Ron Strother

Yeah. We are enjoying right now just excellent creditquality. Of course, you always have credits. As Johnny has indicated in thepast, it's that you look at, but the housing market other than Florida is really not showing muchabatement right now.

So we're looking at our construction projects. We'relooking at the unsold lots. We're monitoring all that, but if there is aweakness, Jon, anywhere, we are certainly watching housing at this point.

John Allison

We're spending a lot more time on asset quality than wehave in the past to be out in the front. I think I referred to our largestbuilder had 12 houses at the last conference call or had 12 under construction.I think he's down to 8 or 9 right now.

So that's positive. Arkansas appears to really be in prettygood shape. I still have my concerns about Florida as the wheels have come off thatmarket, as you know. So it's even impacting the Keys. So if we have anythingthat pops up, it could be in Florida.

Jon Arfstrom - RBCCapital Markets

Okay. The REO balance, is that entirely the liquor store?Is there anything else in there?

John Allison

The increase would be about $4.7 million I think, Randy,isn't it?

Randy Mayor

It's 95% plus of the number.

Jon Arfstrom - RBCCapital Markets

Okay.

Randy Mayor

There's a couple of very, very small, a couple of $100,000amounts at the most in there.

Jon Arfstrom - RBCCapital Markets

Okay.

John Allison

Jon, we have multiple pieces of collateral that will beliquidated and applied to that. So hopefully by year-end that will beappreciably lower.

Jon Arfstrom - RBCCapital Markets

Okay. How do you value liquor, by the way, just out ofcuriosity?

John Allison

Well, we have $971,000 worth of wholesale liquor therethat's bar coded that's $1.360 million retail. So, I'd rather not say what wevalue out on the phone because we have lots of people interested in buying thatliquor right now, Jon, and hopefully by mid-November we may have it all sold.

So, if Royal Bank, RBC Capital needs any Christmaspresents, please tell us because we have lots of inventory.

Ron Strother

We found if you just sample it first to make sure it's notspoiled, it's better.

Jon Arfstrom - RBCCapital Markets

I was going say we could take it for next year'sconference.

John Allison

That would be great. That would be great. That way wecould do some damage to it.

Jon Arfstrom - RBCCapital Markets

Just one last question, on the Fayetteville Shale, we havean analyst internally that covers oil and gas, and he's all over the trends,and it seems like over the last three months or so there's been more positivenews out of there, and obviously I'm not in Arkansas.

I'm just curious if you can give us an update as to howthings have changed there? And if you are changing your plans at all as thisthing seems to be accelerating a bit?

John Allison

Well, so far as the plans we have not changed our plans.As you can see we moved two more branches into the Black County, which is really in the play andup into Quitman, Arkansas, which is in the play and we'llbe moving into Morrilton, Arkansas, which is also in the play.

So we're going to continue with our plan of easing up intothose plays pretty inexpensively. We're leasing and we're taking manufacturedhomes that we've converted, and one of our customers has large grocery storesand we're operating within that market.

So we're trying to do it as inexpensive as we can, but,Ron, you want to update on what's going on in the play.

Ron Strother

Jon, it's really, really interesting, and I assume thishappened down in Texas. They're getting much, muchbetter at the size of the play, and where we thought it was a certain size, theseismographic testing going on right now is really pinpointing where the heartof the gas is.

So, the big winner is Southwestern Energy. They got abouta million acres right in the middle of the play. Chesapeake got in early enough and they'redoing well. For some people that got outside the play they're going to gethurt.

They leased a bunch of acreage and it has defined limits,but we're right in the heart of that play. They're optimistic. There'scertainly gas there. There's a tremendous amount of gas. Obviously the value ofnatural gas, for what it's selling for, will have a function of how fast theyharvest that gas. But we are absolutely in the heart of the play.

John Allison

Jon, it was reported to us by one of our Directors at ourCabot Bank who, at Beebe, Arkansas, that the most, I don't know what thecorrect terminology, is the most…

Ron Strother

Strongest pressure.

John Allison

Strongest pressure, yet, was at Beebe, Arkansas and that's due east of us about20 miles where we have a couple of branches. So they had some problems cappingthis one because they were blowing off whatever they were putting on the wellahead they were putting on it, but they're still finding gas there, findinglots of it.

Jon Arfstrom - RBCCapital Markets

Okay. Great. Thank you.

John Allison

Thank you.

Operator

Our next question comes from the line of Barry McCarverfrom Stephens Incorporated. Please state your question.

Barry McCarver -Stephens Incorporated

Hey, great afternoon, guys, great quarter.

John Allison

Thank you, Barry.

Barry McCarver -Stephens Incorporated

All this discussion about the liquor store, I've lost mycomposure. Give me a second here.

John Allison

Get your order in. Barry, just get your order in.

Barry McCarver -Stephens Incorporated

I could help you value it. I know exactly how to do that.Going back to your original comments on the loan-to-deposit ratio, and kind ofyour game plan there for deposit growth, if you did have to go tap the FederalAdvances or look at broker deposits to fund your loan growth, have you thoughtabout what that could do to the margin, and could you share that with us or isthat already included in your comments about margin pressure?

Randy Mayor

Barry, this is Randy. Some of that is factored in there alittle bit. One of the reasons we haven't really gone back out to the brokeredversus the borrowings is that the market seems to be holding up better, Iguess, in the brokered and the pricing is a little bit more on the borrowingside.

So we've elected to stay very short in the borrowingsbecause of the spread differential. So if we are forced to go out and do someof the brokering, which we're not at this point, as Johnny said, we have over$200 million still left on our Federal home loan bank line, I keep waiting forthe borrowing rates and the brokered rates to get in sync with each otheragain.

If that happens, then we'd be more inclined to go out andget some longer term brokerage, but right now we're kind of hanging onto theextra 25 Basis Points or so that's built into that spread. But if we are forcedto do that that could affect the margin a little bit more.

Barry McCarver -Stephens Incorporated

Okay.

John Allison

We're seeing some national competitors that are in themortgage business that are out there probably putting the pressure on thatbrokered deposit rate right now. They've been very aggressive.

Barry McCarver -Stephens Incorporated

Okay. And then just secondly, Ron touched on the loanpipeline and kind of where are some of your areas of growth. Could you justgive us a little bit more color on your expectations going into the FourthQuarter?

We're seeing you put up really good numbers on loan growthcompared to your peers, but that is still a little bit less than yourhistorical run rate. I know part of that's got to be just protecting assetquality, but could you give us some color there?

John Allison

Well, I'll comment and let Ron comment. Actually, we wouldhave had about almost a $60 million Quarter had we not had the pay downs thisQuarter. We had two large customers that came in right at the end and it'sprimarily driven, Arkansas driven, primarily Twin Cities hasbeen really the big leader and Ron?

Ron Strother

Yes sir. Yes, Barry, there's some movement in the Little Rock market with the couple banks thatyou know of that the signs have changed and we have had just excellentopportunity with customers that we've worked on for two and three and fouryears and these are seven and eight figure credits.

They're 100-year-old relationships and they're now movingour way. So we have such a small share of that market that the opportunity incentral Arkansas is unbelievable, with existing customers, existingprojects and it's just really nice right now. All the banks in the central Arkansas area are doing really well withit and particularly Twin City Bank.

Barry McCarver -Stephens Incorporated

Okay. That's very helpful, and then just lastly, John,could you just comment on your potential for additional acquisitions and kindof the pricing and what you're seeing out there?

John Allison

There's still a spread in a private institution betweenthe bid and the (inaudible). We may just kind of stick our hands into pocketsfor a little bit. We want to watch this credit bubble. As we said in the past,we'd like to pick up a little more in the Little Rock market, but we may juststick our hands in our pocket for a little bit.

We have a fortress balance sheet as you know with a lot ofequity. We have some excess equity that we haven't deployed plus the strongloan loss reserves. I think you know we rank eighth in the nation of 445 banksin percentage of loan loss.

But, we're looking. We have some opportunities as you canimagine. Like, we have lots of opportunities. They come to us and talk to us.We're just not real aggressive today. We're just kind of laying back andlooking for opportunities and those may arise over the next year or two.

It may be Florida, it may be Arkansas or it may be Texas. It may be somewhere else thatwe're looking, but there's going to be some opportunities out there and wethink we're in a position, as you well know, we have a great group ofshareholders.

Our stocks held up pretty well in this tough, toughmarket. So we could use our currency, along with some cash that we have to makesome transactions in the future, and we're constantly looking, but they've gotto come to our terms a little better.

Barry McCarver -Stephens Incorporated

Okay. Well, that's it, guys. Thanks a lot.

John Allison

Thank you very much. Anthony, is there any otherquestions?

Operator

There are no further questions in the queue at this time.

John Allison

Let me just summarize as where we think we are with ourcompany today. We're proud to report record earnings. We talked about the goodloan growth. We talked about the good strong pipeline.

The growth in the core non-interest income is stabilizingnon-interest expense, good asset quality. As we've talked about loan lossreserves, we continue to maintain those strong loan loss reserves, improve loandeposit ratio, improve net interest margin, improving ROA, and improvingearnings and EPS.

I think maybe most of the bad news is out, right now as wespeak. I think it could be out. We saw the big banks reporting today. If thereis a credit bubble, they're going to have to build their loan loss reserves andthat's what was reported today on some of the big banks that their earningswent down.

We've been projecting that for a period of time, as we'vetalked about 37% of the increase in the big bank earnings over the last fouryears coming from bleeding their loan loss reserves. We continue to build ours.

We're not immune to taking the hit, but we think we'vetaken the conservative approach and we'll continue with that approach. We thankyou for the interest in our company and we look forward to talking to you in 90days. And, Anthony, if there is no more questions, then we'll close theconference call. Are there any more questions?

Operator

Yes, there is. There's one question from David Scharf fromFTN Midwest Securities. Please state your question.

David Scharf - FTN Midwest Securities

Okay, guys. Apologize for the delay there. I just wantedto actually follow-up on what you were touching on, Johnny. Given that yourloan loss reserve has been as strong as it has, and credit certainly hasimproved greatly, do you expect to sort of bleed it off a little further?

John Allison

Well, we haven't bled it, as you know. We've maintainedthat reserve. I think it's the time, David, to error on caution. No, we don'tanticipate bleeding that loan loss reserve. The drop from last year wasbasically because the acquisitions in bringing other banks in, but we'vecontinued to maintain that.

We don't anticipate dropping it. However, our book valueis about $14.50, if we dropped our loan loss reserve to peer, we'd have about a$15 book because it would add about $0.60 or $0.70 to the book.

But I think, particularly right now, David, in uncertaintimes, with the market re-pricing real estate in some markets that we probablyshould continue to do just what we've done and we plan on maintaining that.

If in the next couple of years we see asset qualitycountrywide improve, then we always have the ability to bleed some of that off,but that's not our approach.

David Scharf - FTN Midwest Securities

Okay. And then what's your thought process? You mentionedthat you are kind of on the sideline now; the company is generating fairlysolid returns, what about increasing the dividend payout ratio or possiblyinstituting a buyback program?

John Allison

Well, as you notice, we increase our dividend everyquarter. We plan to, if our Board approves it, to continue to increase ourdividends, we can't do it overnight, but where we came from we increaseddividends every year for 15 years straight in a row, and we hope to be able tocontinue to do that here.

The only reason that we would look at a buybackopportunity at this point in time, I wish we'd had one in place, David, whenthe stock got hammered due to the subprime mortgages because we would havebought some, and had we not been on the Centennial deal, you would have seen mebuying, but we're excluded from the market.

But that is the consideration. We've decided that if weneed to buyback some stock, as a result of some crisis in the market that givesus a great opportunity, then we could call a Board meeting in 10 minutes andget authorization from our Board to do that.

So we have sufficient capital to do that, but thus farwe've been able to grind out the increased earnings without either bleeding ourloan loss reserve or buying back stock. And we always have those options, andif we ever need those tools, I guess we can use those, but right now we're justgrinding it out.

David Scharf - FTN Midwest Securities

Okay. To reiterate Barry's thoughts that the quarter wasvery good. Thanks for your time.

John Allison

Thank you. Thank you very much. Anthony?

Operator

There are no further questions in the queue at this time.

John Allison

Again, thank you very much for your consideration on thecall and we'll continue to work hard and we'll talk to you in 90 days. Thankyou.

Operator

Ladies and gentlemen, this concludes today'steleconference. You may disconnect your lines at this time. Thank you for yourparticipation.

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