Home BancShares Q4 2007 Earnings Call Transcript

Jan.22.08 | About: Home BancShares, (HOMB)

Home BancShares, Inc. (NASDAQ:HOMB)

Q4 2007 Earnings Call

January 17, 2008 2:00 pm ET

Executives

John W. Allison – Chairman of the Board & Chief Executive Officer

Ron W. Strother – President, Chief Operating Office & Director

Randy E. Mayor – Chief Financial Officer & Treasurer

Brian S. Davis – Director of Financial Reporting & Investor Relations Officer

C. Randall Sims – Secretary & Director

Analysts

John Arfstrom – RBC Capital Markets

Barry McCarver – Stephens, Inc.

David Scharf – FTN Midwest Securities Corp.

Operator

And welcome to the Home BancShares, Inc. fourth quarter 2007 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 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 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, 2007.

(Operator Instructions) It is now my pleasure to turn the call over to our first participant, Mr. Allison.

John W. Allison

Welcome everyone. Good afternoon. Let me welcome you to our fourth quarter and year end conference call. Even though it seems like only yesterday that we did our IPO, this is the seventh time that we have reported to our investors and I’m proud to say that we have good news again today.

We’ve been able to report improving results quarter-by-quarter in all seven reports. I’m sure you have read the press release and as investors I’m sure you are as pleased as we are. We’ll go the highlights - net income for 07 to $20.4 million up from $15.9 million in 06. It represents a 28.4% increase in net income and diluted EPS went from $1 to $1.17 a 17% increase. Net income for the fourth quarter of 07 was $5.4 million another 20.5% increase over the $4.5 million in the fourth quarter of 06. And, diluted EPS for the fourth quarter of 07 was $0.26 for the fourth quarter of 06 an increase of 19.2. That was 31 versus 26, a nickel. Cash earnings hit a new record of $1.23 for 07 versus $1.07 for 06 and cash diluted earnings for the fourth quarter was $0.33 versus $0.28 for the fourth quarter of 06 an increase of another increase of another 17.9%.

We hit a milestone for the company this quarter. I had reported to you in the past that I thought at some point in time we’d see a one in front of an ROA and I’m proud to report to you that cash diluted ROA was $1.01 for the fourth quarter and congratulations to our people. That was a goal we had and now we’ll raise it up a little bit more. What’s driving this performance? Improved net interest income, maturing balance sheet, we had a $101 million roll off with our securities portfolio, a low yielding in securities that went into loans in 07 and we have $124 million to roll off in 08. Improved non-interest income, strong loan growth, improved efficiency ratio as you see in the report. We’ve instituted strong expense control and you’ll see that in the non-interest expense, particularly in this quarter when it was only up $72,000 and actually if you look at a year-over-year, and I’ll explain that, it was actually down. Improved margins $253 million worth of capital, strong loan loss reserves and we had net recoveries against charge offs for the year of over $50,000. As the rates continue to come down, the company is flatly inverted and it plays to our strength.

Also, a subsequent event to year end, we’re pleased to welcome Centennial Bank of Little Rock as our sixth bank to the Home BancShares family. They have already demonstrated the ability to generate quality loans. We’re very proud of this acquisition and the great team of people that come with Centennial.

After I complete my remarks today, we’re going to go to Ron Strother, our Chief Operating Officer, and Ron will update you on the loan side and then to Randy Mayor for a little more discussion on the margin. We improved margin this quarter even though, and Randy will talk about how we got there.

Some of this I have repeated in my opening remarks, but I’ve kind of run through it. Quarter-over-quarter we were up $917,000 or 20.5% and diluted EPS was up a nickel 19.2%. On the cash earnings side we were up 19.3% to $5.7 million and diluted EPS was up 17.9. On a link quarter basis we were up a couple hundred thousand dollars on net income to 12.7% and earnings from 9/30/07 went from $0.30 to $0.31 a 13.2% increase. Cash earnings were also lackey up 12.1% and diluted cash EPS was up 25.6. That’s kind of a rounding, as Brian tells me, we get a couple of quarters with an extra penny, two quarters an extra penny and two quarters with a penny. Net interest income was up $1.6 million from 12/31/06 to 12/31/07 up 10%. In loan loss reserves, we put in $584,000 in 12/31 of 06 fourth quarter and we put in $1.2 million into this quarter. That was based on strong loan loss reserves and concern over our Florida market. We’ll talk more about that in the future. Non-interest income was up a strong $1.3 million 22.6%. We’re real pleased with that. And non-interest expense went from 12/31/06 of $14.5 million to 12/31/07 at $15.7 million an increase of $1.2 million or 8.3%. Of that, $500,000 of the $1.2 million increase was FDIC premiums and, $1.5 of that was fees associated with generating additional interchange revenue. That was the expense side, the income side to match that was $2.8 million. So it was a good expenditure.

On a link quarter basis net interest income was up $540,000 or 12.4% and loan loss provision we increased it by $648,000 for the quarter or 470%. Net interest income again, strong quarter up $342,000 or annualized at 21.5% while non-interest expense was only up $79,000.

The company has hired a third-party consultant for an efficiency study. We have expressed, you people who modeled us that we would suggest that you model us in the high 50’s or the low 60’s. We would like to be in the 55’s. We have hired a company, we paid for we paid for the initial study in last year, which was more than the $79,000, or actually non-interest expense would have been down. You’ll see us spending probably between $100,000 and $700,000 this year. We hope that doesn’t impact EPS on the study, but we think there’s some low hanging fruit out there that we can get out hands on and we’re going to try to pick that up. There will be no sacred cows in this study and hopefully our Board and our management team will be looking at that study in the next 30 days to determine which of the challenges we want to embark on.

Return on assets 12/31/05 $0.83 and ROA for 12/31 on GAAP basis was $0.94. On a cash basis, 12/31/06 $0.90 and we hit the $1.01 for this quarter. We’re pretty proud of that. Good job guys. Cash tangible ROA from $10.46 last year 10.98 this year and efficiency, which drives the profitability as you know, dropped from $63.10 to $60.54 this year down 256 basis points. On a link quarter basis, September quarter we did $0.92 ROA we did a $0.94 in the last quarter and again we talk about the cash ROA we did $0.99 we got real close to it the third quarter for the 9/30/07 quarter but, we hit it $1.01 in 12/31/07. Cash tangible ROA dropped just a little bit from $11.16 to $10.98, primarily a result of, even though we had good earnings, unrealized loss improvements on our securities portfolio. If you remember, we mark those to market every quarter and as rates have come down, then the equities come up.

Efficiency ratio at the end of 9/30/07 was $62.47 and we dropped to $60.54. One of the drivers has been loans. We did $190.7 million worth of loans. We now have $1.61 billion worth of loans that’s a 13.5% increase. Total assets grew by about by $100 million and deposits were off by about $15 million but that was by design in lots of areas. We had some hot money in there that we let go away. We stayed as competitive as we needed to maintain our market share and we used Federal Home Loan borrowings as well as some broker deposits and the $101 million worth of roll off on the investment portfolio to fund that.

Loan to deposit ratio increased to about 100% up 13 basis points year-over-year. And, we had a strong fourth quarter, $46.6 million worth of loan growth the fourth quarter. It just kept coming in and kept coming in and Ron will discuss how strong that appears to be right now. Total assets were up $24 million third quarter to fourth quarter and deposits continued to remain about flat, there was a little drop there 1.6%. Equity grew $6.5 million to $253 million and loan to deposits went from $97.61 to $100.93. Loan loss reserve, we continue to maintain strong loan loss reserves, that’s kind of a rounding there. We dropped from 184 to$183. And last, non-performing loans, 904% this quarter, versus 574 same quarter last year. Non-performing loans-to-loans, .20 compared to .32 last year, down 12 basis points. And non-performing assets-to-assets increased to .36 from .23. That’s primarily our liquor store and Ron will talk a little more about that in a few minutes.

Loans and leases past due 30 days or more including past due non-accruals loans and leases to total loans were .46 versus .74 a year ago matching quarter. On a link quarter basis loan loss reserves dropped from 183 to 184one basis point and allowance dropped from September quarter at 1,052% coverage to 904 as non-performance picked up just a hair. Non-performing loans-to-loans were .17 at 9/30 and .20 at 12/31 and non-performing assets-to-assets were .34 and .36. And loans and leases 30 day past due including past due non-accrued loans and leases to total loans dropped from .48 in the September quarter to .46 down 2 basis points.

the year, we opened six branches, Key West, Key Largo, Quitman, Arkansas as we continue to edge up into the Fayetteville Shale. Two more in Searcy, Arkansas, White County, a little bigger play than the Fayetteville Shale and in Bryant, Arkansas. Pending branches, presently. We had two, Morrilton, Arkansas, a little more play in the Fayetteville Shale and then our community bank in Cabot is adding another branch.

At this point in time, I’m going to go Ron Strother for some information on the loan portfolio. Ron.

Ron W. Strother

I think I’m going to go head and reiterate what Johnny said. Our loan growth has just been phenomenal and from Q3 to Q4 as Johnny indicated, we had $46 million of growth that’s almost 12% and for the year, we’re very, very proud that we put $190.7 million on the books. We were in the teens. Our annualized growth was 13.5 which we’re very proud of in this very difficult market. Q4 07 saw the majority of the loan production coming from the Arkansas banks and, most specifically, central Arkansas. About 55% of the production came out of the North Little Rock Bank, the other two central Arkansas banks contributed about 16% each. So, clearly about 85% of the production came within the Little Rock MSA.

Let me talk about NIC’s for a second. We really stayed on balance. Q3 07 81.2% of the portfolio was in real estate, it only dropped one BP at Q4 07 it was 81.1. Interestingly, you might note that we had more fixed than floating so obviously in a falling rate environment we’ll get a little pick up. About 54% of the portfolio is fixed, about 46 float. Most of the demand has been in non-farm, non-residential with a slight drop in construction and development. We had good growth in retail. The hotel industry continues to be very viable for us, principally related to the Fayetteville Shale phenomenon.

Johnny also touched on the pipeline. I’m proud to tell you that, especially with Centennial Bank coming on that it looks like we’ve got near $100 million of pipeline prospects, some of that is Fayetteville Shale vendors and we’re very, very pleased with that.

I want to break tradition here, especially for the Analysts, or John and Barry and Joe and David. I hope you all have a pen because I’m going to give you a little guidance finally. What I want you to do is go to www.BidForAssets.com\liquor and what you’ll find when you go there is Marine Bank has a liquor auction and you can look at the lots, We’ve got 76,000 items in the lots. It starts January the 29th at 8:00 a.m. and it runs for a couple of days. So if you will, please join in.

John W. Allison

For you Analysts, we’d appreciate it if you’d all bid it up pretty good for us. That’d help us on our recovery. Randy, we had a little surprise on margin. It did a little better than we anticipated. You want to tell us what happened?

Randy E. Mayor

Sure. As Johnny mentioned, our net interest margin improved 6 basis points and if you recall, last quarter I think I mentioned that we anticipated some additional pressure on the margin for the next two quarters because of lag time between CD re-pricing compared to floating rate loan re-pricing in a down rate environment.

There were really three principal areas that kind of helped us overcome that pressure. The first is we have aggressively monitored and worked our liability rates. The banks were able to reduce the yield in overall interest-bearing deposits by 20 basis points. Our loan yields did come down about 22 basis points, so that was a big influence to help offset that decline on the loan side. In addition, we had made a conscious decision to keep our other funding sources, such as FHLB borrowings, Fed funds purchased and REPOS on very short maturities and we’ve been able to ride down the rates, improving the yield on that group of funding about 50 basis points. And then the last piece of it, we continue to reallocate assets from our investment category to loans which has also helped to increase our margins. So those are really the three basis areas that have helped recover some of what we had anticipated in the decline.

John W. Allison

That concludes my remarks, except for closing remarks, Amy, if you’re with us, do we have any questions from the audience?

Question-and-Answer Session

Operator

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

John Arfstrom – RBC Capital Markets

Question for you on the efficiency study, what kind of timing do you think you’ll have? And, is there any targeted savings that you’re shooting for?

John W. Allison

Well, our references on this company went from fair to excellent and the fair portion of it was they had annual savings of two times their investment and the excellent was four times the savings on an annual basis. So, Randy do you want to address what you think on the timeline there?

Randy E. Mayor

The timeline they’ve been pretty aggressive. They just started this in January and they’re about to present us with what I would call the first phase of that study and then we’ll have to look at that, John. It’s really our determination at that point as to what steps we pursue and try to pick up there. So we really are just through the first phase, so we don’t have an estimate at this point of what they’re seeing or what they’re estimation are. So, can’t really tell you what it has been, but as Johnny said it’s been from a 2 to 400% return on the investment. But, of course, there will be some lag time there if we choose to pursue those options, it will be an expense up front.

John W. Allison

We also find that the 200% investment that he’s talking about would be recurring investment too.

John Arfstrom – RBC Capital Markets

How do you determine the size of the investment? Is that fee’s that you pay them?

John W. Allison

Yes.

Randy E. Mayor

Yes.

John W. Allison

They’ll come back to us, as I understand John, with maybe seven projects that they’ll price from $50,000 to $150,000 per project and our management team and Board will make the decisions of which of those projects, if any or all, we want to proceed with.

John Arfstrom – RBC Capital Markets

On funding, you talked about - I remember your quote from a year ago, you talked about $100 million coming out of the securities portfolio and you hit that number. Now, you’re saying about $124, I think was the number. When you pencil it out, it sounds like you have some strong loan growth, and if you match last year’s $200 million and I guess the question is, do you feel like you can hang on and grow the deposit you have to fund it? Do you have to borrow to fund it? Or, just walk us through a little bit? You’re thought process on that?

John W. Allison

Well, we’re going to go the lowest cost of funding. We have stayed short with Federal Home Loan funds when we needed them, paying in the 4¼ range. Rates are coming down, the short end’s coming down. We picked up about $20 million at 250 the other day. We like those rates. We think it’s playing to our hand. CD’s are coming down. With the fact that Bank of America is buying Countrywide, we believe that reality will turn back there and broker deposits nationwide will come down. We only have $39 million worth of broker deposits and we have about $200 million worth available Federal Home Loan borrowings. So we’ll crank it. I think it’s actually working to our favor. Rates are coming down, CD’s are coming down, borrowings are coming down, if we stay disciplined - we were tempted a while back to step out and buy some money, we didn’t. It hurt our income a little bit, because we stayed so short, but now it gives us an opportunity to step out at some of these low price money, John.

Randy E. Mayor

One thing on the $124 million that’s coming off of there, some of that is restricted for pledging purpose.

John W. Allison

That’s true.

Randy E. Mayor

So, we won’t be able to turn all of that. But as we can free it up from pledging we will definitely continue to reallocate.

John Arfstrom – RBC Capital Markets

And then, Ron, just one question for you in terms of the loan growth, you talk about where, but what do you think driving it? And, also we’ve seen spreads widen through a number of different asset classes, and I’m wondering if there’s still the appetite by your customers for fixed-rate loans? And, are you able to move the spread up a bit? And, even though the primary is obviously coming down, are you still able to get what you think of the fair yield unfixed rate product?

Ron W. Strother

We’ve been very lucky to still deal with the mini-perm product, which is a three-year maturity, and we’ve been very, very successful in that. Where it’s coming from, especially with the Centennial guys, these are relationships that hark all the way back to First Commercial Bank, and we’re still moving major, major relationships out of those other banks. The Fayetteville Shale plate clearly is helping us with some vendors. The Cabot Bank and Conway Bank are making good inroads with people that are offering products to Chesapeake and [inaudible] and so it’s coming from there. The hotel industry is still strong and, we’re not having to concede the rates that far and we’re floating some of those, customers are doing that. And, in exchange for a floating rate, John, we stay relatively short. We’ll stay like three years.

John W. Allison

Our Twin City Bank, the fourth quarter was our big loan engine. It takes a while to move relationships, but that was the big horse in the fourth quarter. The Conway Bank has improved over $50 million already this month, quality, quality loans. The customers we know and relationships that we’ve built that are projects that are going on in and around Conway, Arkansas. So, it is the strongest January and in loan committee, they’ve been very long. They pay us $250. I told them we was going to start charging by the hour, but they’ve been from 3:00 to 7:00, the loan committees have and lots of good credits coming in.

Ron W. Strother

John, specifically Twin City in that fourth quarter, of the $46,620,000 they produced $25.8 million. So they have a very, very, very strong quarter and, as John said, they continue to enjoy a very good pipeline.

Operator

The next question comes from Barry McCarver from Stephens, Inc.

Barry McCarver – Stephens, Inc.

We’ve talked a lot about the loan pipeline already, but I guess just because it seems so strong and certainly not everybody is seeing this, any particular market you expect this year? And, I guess more specifically, the question for Ron would be what type of loans are coming on here? Is this is a lot of construction we’re looking at? Is it more C& I?

Ron W. Strother

It is C&I. Of course, the vendors, the Fayetteville Shale thing are receivables inventory carrying for those major companies. Great retail operator at Twin City, $10 million credit. We’re still getting some hotel stuff, some multi-family. A wonderful, wonderful opportunity here in Conway, who you would know well, you would know this borrower well, we have a wonderful multi-family opportunity. Warehouses is doing extremely well particularly in Conway, and with the Fayetteville Shale phenomena. So it’s not one but it isn’t construction. To answer your question, it’s not really construction and land development. These are in the non-farm, non-residential category, Barry.

John W. Allison

There’s not a warehouse left in Conway. Two Fortune 500 companies since the Fayetteville Shale boom, as you well know, is working so well. A lot of people didn’t believe it was going to be real, and with the monies being pumped in here, there’s lots of companies coming in and there is a shortage of warehouse space. We just picked up, one of our shareholders they had customers, a large warehouse loan.

Barry McCarver – Stephens, Inc.

John, asset quality is certainly not an issue for Home BancShares. It still looks very good, but you know as well as I do, that’s what the industry is focused on right now. Kind of your thoughts on what 2008 could look like? Do you see any change in any of your markets that will affect your bank?

John W. Allison

I think non-performers are going to go up, you know. I think they’re going to go up. That’s the one thing that wakes me up at night, and if it’s waking you up, don’t let it bother you because it wakes me up. That’s the one thing concerns me. I see a little crack in the armor out there. I told you last couple times, I think we’re going to get some houses back in Florida. We got one of those this quarter. I think we’re still going to get some houses back. The Florida market has not improved. I have concerns about the Florida market. Arkansas has stayed pretty strong. We have a couple of builders out there that could get their selves in trouble. We’ve done a good job of underwriting those credits and we’re well positioned, I think we’re well positioned. Of course, you know that we’re picking up about $2 million of non-performing out of Centennial, but that’s part of the carve-out that we did. We found that when we did the due diligence on the company and we carved that out. So, you’ll see that, but our shareholders don’t have any liability there. But, that’s why we built $30 million worth of loan loss reserves, to be prepared for what could happen and I still think non-performers is going go up. I guess if the world came to an end, they could go to 2%. If it’s reasonable, they could go to .6. So, somewhere in that range would -you know, the ones I think about from to time that wake me up, I think, well is that one going to be all right? Is that not going to be all right? So, I’d say that’s the range I was going to forecast at, give you little insight to where I saw us going in 08.

Barry McCarver – Stephens, Inc.

It sounds like what you’re trying to tell us is it’s more of a getting back to historical norms, a measured increase each quarter, maybe a little MPA, nothing really significant all at once.

John W. Allison

I think that’s exactly right. There’ll be some workouts in there as there always is and ebb and flow, as you know, in the non-performing. Hopefully, our liquor store, we get our liquor sold and the building will be, I think Hunter has it 100% leased now and it’s throwing off an internal rate of return of about 8 or 9 or 10%. I don’t remember what Hunter said, but it can be marketed pretty quick. We get that off the books. We got a house or two in the Florida Keys to deal with. We’re not immune. We’ve done a good job underwriting, but we’re not immune. But that’s why we got $30 million worth of reserves, and we haven’t taken negative provisions. We’ve continued to build our loan loss reserve, as you can see in the fourth quarter. We added, this year, another $3.2 million to loan loss reserve, even when we had recoveries.

Barry McCarver – Stephens, Inc.

My last question you’ve already answered part of it, but on Centennial when that thing comes on the book and we take a look at it when you report the first quarter will have some non-performers come over. Can you give us an idea of what the end of the year, in terms of net interest margin? Anything else that might stick out when they roll on?

John W. Allison

I’ll let Randy. I don’t know if we’re [inaudible]

Randy E. Mayor

The bottom [inaudible] and I don’t know if we have all of the margin impact for them at this point time in time. The one number that I do have is, just because I know it off the top of my head, is that our allowance for loan losses, the percentage of loans, if they were combined on day one. If they were on 12/31, it would drag our ALL to loans down 7 basis points. We’re at a 183, so I guess the math on that would be 176.

Ron W. Strother

They’re at a 120, Barry.

Barry McCarver – Stephens, Inc.

That’s the kind of things that we’re looking for here, just so we’re not caught off guard.

Randy E. Mayor

One other thing on Barry’s comment actually, Centennial has not closed out their general ledger at this point in time. I think they’re going to run their final ledger tonight.

Operator

Our next question comes from David Scharf from FTN Midwest Securities

David Scharf – FTN Midwest Securities

A lot of my questions have been answered, but I just want to kind of follow up on a couple things. I was wondering about the 30 to 89, day past due list. I think you mentioned it was 46 basis points. Is that right?

John W. Allison

That includes non-accruals.

David Scharf – FTN Midwest Securities

Does that include the 90 day past due?

John W. Allison

Anything 30 days or over and non-accruals is .46.

David Scharf – FTN Midwest Securities

As far as the watch list, how is that performing?

John W. Allison

Fine.

David Scharf – FTN Midwest Securities

No change with regard to how you mention Florida is feeling a little soft?

John W. Allison

Florida is soft, there’s just not much going on there and we’ve got some concerns there. If this continues in that market, we’re going to have some problems there. We’re just reserving for it and being prepared. Hopefully, it won’t but you got to get out in front of these loans and that’s what we try to do. We try to get out in front and look at worst case scenario. I want to know the worst news that can come in and hopefully, it’ll be better than that. That’s when I say non-performers could go to 2%, I think that’s the max that they could go to if everything blew up, that I know of company wide. So that normally doesn’t happen, as you know, as conservative as we operate, David, I like to have the worst out there.

David Scharf – FTN Midwest Securities

In this market, that’s a good strategy. And then with regard to the pipeline, if you’re going to put a percentage on it, on closing, what percentage would you say, historically, you’ve operated on?

John W. Allison

The $50 million in Conway, I’m going to put 95% on that. They’re our customers, the deal’s done, basically, and we’re starting to fund. One of them we close the 30th of this month. There’s about $14 million of that closing the 30th.

David Scharf – FTN Midwest Securities

Does that number include Centennial’s contribution?

John W. Allison

No. That’s just Conway. Conway has the strongest private, it’s got about $50 million. Centennial’s got about $50 million in the pipeline. Ron, you want to talk about where they close, what percentage you think?

Ron W. Strother

These, again, are moving relationships, David, and they have a very high closing rate. Twin City, which has been the lone horse the whole time, they, too are moving relationships and they had, as you saw, $25 million quarter. So, all the central Arkansas banks are strong.

John W. Allison

And Cabot’s strong. Cabot’s or Community Bank’s got a good pipeline. That was Twin City up $25 million, but they sold another $10 million of over lines out to their, or $12 million to the rest of the banks. So, it’s pretty nice right now.

David Scharf – FTN Midwest Securities

And then, could you just give us an update on the six branches you put in the network this year as far as deposit gathering? It sounds like you’re going to have to fund the robust loan growth with some borrowings, but just sort of clue us in on how you feel about the branches.

John W. Allison

I don’t have that information. I apologize. I looked at Bryant, Arkansas when Twin City opened that one and the transaction had already hit the transaction totals of - daily transactions had already hit the level of some of our other branches. Of course we opened two new branches in Searcy, Arkansas, as you know. Those deposit growth, they just opened, so we don’t have a lot of deposit growth in there, but that’s right in the middle of the Fayetteville Shale. The little Quitman, Arkansas move up is in the Fayetteville, I think it’s about $8 million already in Quitman, Arkansas. And I don’t have the totals on Key Largo and Key West. I apologize.

David Scharf – FTN Midwest Securities

How should we look at the Fayetteville Shale as far as the deposit gathering? Is it going to be more of just of a loan generation? Or, do you see it eventually transitioning to some good solid core funding?

John W. Allison

I think it’s going eventually transition to good core funding. What we’ve had is the initial run where they leased the land and now they’re drilling, until they get paid out, then our people start getting their money. But where we’re seeing it right now is our motels, restaurants, warehouses, everything’s full. Housing, everything is full here right now, even though residential tailed off a little bit, we’re seeing it through the businesses that we operate with. The little quick shop stores, there’s 25 trucks in front of them in the morning, at 6:30 in the morning. So that’s where we’re seeing it. Ron had put a team together and is going after the Fayetteville Shale with Tracy French out of Community Bank in Cabot as well as First State Bank and we’re out making calls on these people, finding who the land owner is, knocking on the door, introducing ourselves. I think we made 92 calls last month, or something like that. So, we’re out putting cards in people’s hands and introducing ourselves. We know a lot of these people, those we don’t know, we’re introducing ourselves. We probably need to get into some wealth management at some point in time, but that’s not been our field. We probably need some direction there because there’s going to be a lot of money coming in.

Ron W. Strother

David, today’s newspaper announced the major oil companies, the Fayetteville, Arkansas Sam Walton School of Business study that yielded the $5 billion to be spent in five years, they funded today to update that study. Hopefully, that’ll be coming out in a few months. So we’ll have new statistics on the ripple effect of the play.

John W. Allison

Amy, are we complete so far?

Operator

We have no further questions at this time.

John W. Allison

I want to thank everyone for your support in 07. It was kind of a wild year, they kind of beat up our stock like they have everyone else. But we put 07 to bed in great shape. 08, we have a look out, we’re dealing with economic uncertainties and declining home prices, higher unemployment rate, and we’re seeing no improvement in Florida. I’ve talked about NPA’s where they could go, in a worst case and a best case scenario and we talked about the $2 million that’ll come on from Centennial that’s part of the carve-out. From the pros, your company has a fortress balance sheet with nearly $353 million in capital, that’s nearly a $100 million in excess of the well capitalized financial institutions. I know you think, it’s probably a good time to have that $100 million in excess capital. We have our hands in our pocket and we’re looking out there to see if there’s opportunities, when the opportunities come up. But if they don’t come up, and someone - our stock’s selling about one four book, it doesn’t make a lot of sense to pay somebody one eight a book or two times book, we may just buy some of our own stock.

From the reserve, you know the story on reserves, how strong it is. It’s 18th in the nation in reserve, with a 183 percentage, almost $30 million in reserve. Our peer group happens to be at 105 and we’re at 183 that’s 71% more in reserves. So if we wanted to play the games and pop earnings, we could’ve played the games and popped earnings. We could have done a reverse. You see, some people out there that did the reverse provision, and then turned around and put in big provisions. We maintain good asset quality. Ron and I have talked about the pipeline, the strong pipeline. You’re seeing improved margins, we’re working hard on efficiencies, non-interest expense is under control, improving revenues. We’re sitting in the middle of the Fayetteville Shale, it continues to boom.

We think 08, pending some prices in the financial community, should be a great year again for the company. We thank you for your support and we’ll see you in 90 days.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!