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Home BancShares, Inc. (NASDAQ:HOMB)

Q1 2008 Earnings Call

April 17, 2008 2:00 pm ET

Executives

John W. Allison – Chief Executive Officer

Robert H. “Bunny” Adcock, Jr., – Vice Chairmen

Ron W. Strother – Chief Operating Officer

Randy E. Mayor – Chief Financial Officer

Brian S. Davis – Investor Relations Officer

Analysts

Jon Arfstrom - RBC Capital Markets

Barry McCarver - Stephans Inc.

Charlie Ernst - Sandler O’Neill

Joe Stephan - Stephan Capital

David Scharf - FTN Midwest Securities

Tom Ferney - Decade Capital

Operator

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated First 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. (Operator Instructions).

The company participants in this call are John Allison, Chief Executive Officer; Bunny Adcock, Vice Chairmen; Ron Strother, Chief Operating Officer; Randy Mayor, Chief Financial Officer; 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 10-K filed with the SEC in March, 2008.

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

John Allison

Thank you Amy, I appreciate it. Good afternoon, and welcome to our first quarter earnings conference call. Since, the last time we spoke of what the history may record is some of the most stressful financial times in many, many decades. Paying the charge-offs, record foreclosures, locked up credit markets, all over a $110 a barrel, major economic slowdown, discussion about whether we are in a recession or not, we happen to think we probably are, banks having to write billions in new capital in order to maintain strong capital ratios, major drops in the interest rates and trashing of the U.S. dollar. Strange things happened that I’ve never see in my business lateral in 40-years and I don’t think it’s over yet. But, with the Jamie Dimon deal, the move on Bear Stearns it appears that maybe just for the short run that the financial system may have survived the wreck.

At least we may have moved from intensive care to stable. This was the time to keep our defense on the field being proactive on asset quality, building loan loss reserves when the opportunity avails itself and protecting capital; as we all know capital is keen. At press you have seen our earnings release and even though the quarter was very busy with the introduction of Centennial Banker acquisition out of little wreck by the way was accretive for the quarter, good job guys and our onetime gain from White River Bancshares is $6.1 million. Also on the expense side we had the Metavante efficiency study that we discussed in the last call, a very expensive study and we took the majority of that expense this quarter. We continue to build reserves and our liquor store Oriel write down as a result of the liquor not bringing as much as we thought it would in Florida.

The company produced another record profit quarter and even with out all the noise to the quarter, it was a record quarter on the same-store basis, and it is the best quarter in the company’s history. Let’s go to the numbers. There will be a little -- there are little afraid as a result of all that is referred to as the noise in here, but we’ll clear that before them -- the presentation is over.

Net income was up 52.9% to $7.3 million up $2.5 million, pretty good increase. Diluted EPS was from 27 -- this is year-over-year, by the way -- 27 to 39 up $0.12 or 44%. While our cash earnings like wise was up 50% or $2.6 million from $5 million to $7.6 million. Cash EPS went from 29 to 40, up a $0.11, which equate it to 37.9% on an annualized basis.

Net income on a linked quarter basis, was up $1.9 million from 5.4 to 7.3. That’s these numbers skew a little bit as a result of the gains, that’s a 140% and diluted EPS was up from $0.31 to $0.39, up $0.08 or 103%. Cash earnings likewise up $1.9 million or 134% to 7$.6 million and cash diluted EPS was $0.40 versus $0.33. Centennial acquisition in the first quarter, we made about $578,000 and was flatly accretive to the company for the quarter.

Net interest income was up $4.7 million or 29.7%, a record $20.8 million and loan loss provision, as we built loan loss provisions, when we think its appropriate, we put first quarter last year, we put in $820,000, we put in $4.8 million in loan losses there. I would have put in more, but that’s all the accounts will let me put in.

So, Non-interest expense -- non-interest income was up from 6.3 to 13.5, an increase of $7.3 million that’s primarily is the result of the $6 million gain, that’s a 118%. Non-interest expense grew up likewise by $4 million, and we had the Metavante charge and then we will talk about that more in a minute.

Net interest margin surprisingly in these crazy times, we are able to build margin by 36 basis points from 342 last year to 378, that’s been a strong emphasis -- had a strong emphasis in the company and we worked very hard on it and we are slowly getting there. On a linked quarter basis, net interest income grew $2.9 million from 17.9 to 20.8 up 66.9% and even with that Centennial in the picture the core banks would have grown at 13.6%. Again our loan loss provision, we put $1.2 million in the fourth quarter and 4.8 in this quarter and up $3.6 million.

Non-interest income on a linked quarter basis from 6.7 to 13.5 except 6.8 primarily results of the $6.1 million gain. A margin for our quarter on a linked quarter basis increased 17 basis points -- favorable 17 basis and Randy Mayor, will talk more about that in the future. Centennial came in for the quarter with the 3.96 or our new addition helped more or less a little bit.

Our return on assets, were 115 on a GAAP basis versus 88 last year for the March quarter and with cash ROA was 122 versus 95 up 27 basis points, so, that’s got some to gain in. We would like to be operating at that basis hopefully this efficiency study helps us like we think it is, maybe that could be a regular a bit for the company.

Cash trends of ROE for the first quarter was 13.53 versus 10.96 for the first quarter of last year and efficiency ratio dropped from 62.52 to 51.94, that’s a good number. I sure would like to stay there, but we know that’s probably not going to happen at this point.

On a linked quarter basis, the ROA went from 49.4, the last quarter of the year to 115 this year and own cash from 101 to 122 and likewise on the cash tangible ROE went from 10.98 to 13.53 and efficiency went to fourth quarter. We pulled that down, we towed it by the models in the low 60. Our goal is to get it in the 50s, but fourth quarter we were 60.54 and we’re 51.94 for this quarter. Loans, strong loan demand continue the strong loan growth, that's can be in the driver of the company, up $391 million or 26.5%.

Total assets grew to $367 million to $2.57 billion up 16.7% and deposits which have been fairly anemic in the past year and a half grew $226 million up from $1.63 billion to $1.85 billion or 13.9%. Stockholder equity grew $50 million to $286 million and loan to deposit ratio grew from 90 to 100%.

On a linked quarter basis which may be more meaningful, loans grew $67.2 million, one of the best loan growths in the company's history and even without the addition of Centennial, loan growth was 15.56%. Total assets grew $279 million as the addition came in from Centennial and total deposits $83.7 million, actually company viable grew 262, but 83.7 of that came from same-store sales and was at increase of 21%.

Now we are seeing money come to the bank. I don’t know if it’s a flag to quality, I don’t know what it is right now, but, we are seeing the money come to the financial institutions. Maybe people have realized the fact that some other money market accounts are backed by sub-prime mortgages and it is certainly appears to be a flag to safety, right now and I hope that continues.

Our stockholders equity grew to $286 million, up $33 million for the quarter and we’ve brought in centennial and loan to deposit ratio decreased slightly 27 basis points as for the first time in a long time deposits outstripped loans and last to loan loss reserve, we’ve grown our loan loss reserve from 183 last year to 199 up 16 basis points and our last non-performing fell from 436 last year to 308, still very healthy in the market.

Non-performing went from last year at 0.42 to 0.64, and non-performing assets to assets went from 0.3 to 0.67. As we told you before that our range was on the low side 0.6 and we’ve ended up on the low side of the range. Loans and leases passed in 30 days or more including passed the non-accrual loans and leases, the total loans and leases decreased. From last year they were 0.87 at March quarter last year and they dropped down 4 basis points to 0.83.

On a linked quarter basis again we rose from loan loss reserve from 1.83 to 1.99. Coverage ratio dropped from 904 to 308 as non-performers went up. If you remember when we did the Centennial transaction we had about little over $2 million, we actually identified about $8 million was a credit, that we had a disagreement over, so we set aside money’s on that transactions to cover those in the event that those loans do not perform. If they perform and we accept on that’s fine, if they don’t and there is a loss incurred already comes out of that force in the money’s. So, that was about $2 million of it, so if you take the representing coverage ratio at 308, if you pull the $2 million out, which is really on their ticket, the shareholders of Centennial, not ours, that’s a coverage of 370.

Non-performing loans to loans came in at 0.64, if you pull that $2 million out they’d drop to a 0.54, which was below the low end of our range and non-performing assets to assets were report at 0.67 if you pull that $2 million out again, it drops to $2.5 million. So, these -- we weren’t happy with the increase of non-performing, but it is certainly manageable.

Our branches opened during the first quarter ’08, is Cabot, Arkansas, our community bank which continues to be running very, very well and doing an excellent job, has opened a new branch in the Cabot area and in Morrilton Arkansas we said before we continue to move further up into the Fayetteville Shale play and we will have more reports on that today.

The Vice Chairman of our Board, Bunny Adcock is going to report today on the Fayetteville Shale and what’s going on in that dynamic market. Now that concludes most of my prepared remarks other than the summary and as usual we’re going to go Ron Strother whose is the longer root for the company and let him give us a loan portfolio update. Ron?

Ron Strother

Thank you, Johnny. Let me start with volume and I will cover three things, so volume, mix and asset quality. As John indicated our first quarter loan growth was very nice. We’ve reported loans up about $62 million or 15.56% annualized on the same-store but as Johnny said when you roll in Centennial, the loans grew 260 in Q1’08. The pipeline is strong in most of the central Arkansas Banks and fairness a bit slower in our other markets. Just as a footnote on the volume, in the first quarter 84% of all of our loan volume came from the central Arkansas Banks. So, a very good quarter for them.

Let me move to mix and it was affected by the Centennial acquisition. Our expertise and concentration continues to be in real estate lending. Total loans secured by real estate on the last call, it was 81.1 at quarter-end Q1’08 and it moved up to 83% with the addition of Centennial and other bookings. However, within the real estate category, construction and development activity went down about 4.6% while non-farm non-residential grew. We continue to be comfortable with this mix and the pipeline substantially reflects that philosophy.

Let me move to asset quality. Johnny has already touched on it. I just want to make a couple of other comments. NPA's did increase, but it was anticipated, was some Florida credits going non accrual, but correspondingly we increased the provision for loan loss to help cover any perceived exposure there.

We do not -- we do anticipate the liquor store that John talked about. He spoke to the liquor, the rest of it, we hope will be liquidated by the end of June, and that's about a $5 million figure in the NPA's and we hope it to be going at the 6:30 call. I just want to make a comment on the NPA's and on what we typically do. As a matter of practice we monitor all acquisition and development loans very closely we understand if they are on schedule, if they are within budget, if the market is still right for the absorption, there is clearly a slowdown in housing sales, that has hampered the sale in all markets particularly Florida. Our subsequent checks include monitoring for the borrower secondary source of repayment, if conditions have changed; we downgraded accordingly and make the provisions where necessary, which is what you saw. This proactive style has served us well in the past and as Johnny said the NPA’s are at the lower end of the range previously communicated.

John Allison

Ron, thank you. We will go to Randy, and let him talk about margin and what happened this quarter. Randy?

Randy Mayor

As Johnny had mentioned earlier, our net interest margin did improve 17 basis points on a link quarter basis. The yield on our interest bearing assets declined 29 basis points from 715 to 686 with a majority of that attributable to the loans, the loan portfolio yield declined 46 basis points from 777 to 731. However, we were able to offset the 29 basis point decline on the asset side with the 51 basis point improvement on interest bearing liabilities, which dropped from 401 to 350 and deposit yields improved 41 basis points from 388 to 347, but the most significant change was on our borrowings where the average rate dropped from 471 to 375 or a 96 basis point improvements.

In the last couple of calls, I’ve tried to give a little bit of forecast or color on what I thought it was going to happen to the margin and in both instances I was thinking we would see a squeeze, but in both instances I have been proved wrong. So, I think a more quit trend to predict the future and just report and what is happening in the quarter on a go forward basis and with that John, that’s all I’ve got.

John Allison

Yes, thank you Randy. I think you said, we are negatively gapped and in a year’s range it would play to us, but in the next two quarters, if you call it the, you thought we’d get a little skews and we have been able to widen that margins, so that’s good news. With us today as our Vice Chairman Robert H. "Bunny" Adcock and he is going to talk to you a little bit and tell you the update on the Fayetteville Shale. Bunny?

Robert "Bunny" Adcock, Jr.

Thank you Johnny. Couple of month ago Johnny asked me to give a presentation on the Fayetteville Shale formation and the economic impact that it have on our five counties, at our annual meeting. Now the reason is a significant is that we have facilities located in four of those counties and as Conway is considered the economic center of the Fayetteville Shale play. About the same time Johnny asked me to do this, University of Arkansas Center for Business, the economic research, released a report that have been funded by the natural gas producing companies.

I have stated in the past couple of months as done in this report, I’ve actually interview the author of this extensive report. Report stated that the companies will invest about $12.5 billion and this will result in the total economic impact of $18 billion and yesterday morning, I picked up the Arkansas democratic and I read it. Natural gas companies future spending will make completely irrelevant; a recent study on the economic impact of drilling in the Fayetteville Shale formation in North Central Arkansas.

The observation was made by Aubrey McClendon, Chesapeake Energy Corporation Chief Executive. He said “the company's will spend between $75 billion and $100 billion in the next decade. It really can be transformative” McClendon said, but obviously, I have wasted two months forming over this data from the University of Arkansas report.

Now the question is what calls these two diversion opinions. First of all the University of Arkansas, were using last and previous years figures of $6.20 per thousand cubic feet in their study, where the market today is about $10.20 per thousand cubic feet.

Last month the legislature passed and the governor our severance tax bill which just led to the uncertainty that had held up a lot of the investments. Also the production companies indicated the wells production numbers had been better than they had expected. Also there had been two announcements since the study was completed indicating more activity than we had previously thought.

First was XTO Energy announced the acquisition of 55,631 leasehold acres for $520,000 to $1 million. That will take XTO to a total of 300,000 net acres. Next was Petrohawk Energy Corporation purchased 18500 acres for $222 million. This acquisition will bring Houston base with Petrohawk totally sown in Fayetteville Shale to about 150,000 acres. Now, if Mr. McClendon statements are even partially accurate, the Fayetteville Shale play is going to be transformative.

The universities reported forecast at 12,000 new jobs, but with Mr. McClendon's report this could triple or quadruple, reported forecast a $185 million property taxes, same thing it could triple or quadruple. The Department of Finance Administration had forecasted a $100,000 per year in severance taxes and again this could go up considerably. If we use Mr. McClendon's optimistic number of $100 billion of investments applying the University of Arkansas multiplier, the economic impact on our play of counties could be as high as $140 billion. Johnny, that’s my report.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Jon Arfstrom from RBC Capital Markets.

Jon Arfstrom – RBC Capital Markets

Good afternoon. Thanks for that information on the fair-guild show. I guess one of the things that comes to mind is what kind of competitive reaction are you seeing from other banks? Are you seeing other set up shop in the area? Do you still feel like you can maintain the dominant market share that you have?

John Allison

John we have it -- our market share continued to -- it grew last year in the market. We didn’t – there’s really no competitors Ron. If we haven’t seen anybody coming in, there’s enough banks in here to service the oil and gas and get their piece of it, but we have not seen it John.

Jon Arfstrom – RBC Capital Markets

Okay, you should keep quiet then.

John Allison

Well, it really -- as you heard buddies report it is very exciting and one of the engineering firms is moving in here. They said they would be here for thirty years. This play is not short term, it’s long term.

Jon Arfstrom – RBC Capital Markets

Okay, a couple of other questions. In terms of the deposit money you talked about, is that coming into all of your banks and how would you rate -- how are the rates that you are paying stake up against your competitors.

John Allison

I am going to let Randy take that one.

Randy Mayor

Jon it is coming into most of our banks, pretty much a break down. I think twin city probably saw the majority of that with some good growth in both Crain and Centennial and First State and the rates as far as – there’s been a little bit written. I think there he has written a few things that deposit pricing has returned to normal basically and in our Arkansas and we are seeing that, so the rates that we are getting there are reasonable rates in our opinion and we are not really running any specials or anything for that. We are still quiet a rate below the brokered rates out there, so I think it’s general. As Johnny said, it might be a little bit of applied to quality, the stock market shake up has brought some people back to the banks and CD markets. So we are able to grow deposits at a reasonable rate there.

Jon Arfstrom – RBC Capital Markets

Okay, okay and Ron can you talk a little bit about what else -- what you took into the non-performing loan category to generally what the credits are like.

John Allison

Yeah, it was John -- it’s principally in Florida market there was a single family house where the folks are renting for a while. It was a pretty substantial, it’s a very, very nice house and I think you may be had a look at that when you are down there; beautiful properties. There was another future development on some five units that we took in that went non-accrual for the quarter, bit it’s not any one particular large project, it’s made up of a number of properties, principally in the keys.

Jon Arfstrom – RBC Capital Markets

Okay and then in terms of the REL, is that the key logo strip mall, that in REL?

John Allison

Yes sir, we referred to it as the liquor store. We have an indication on that, with a little more color, about $300,000 plus for the liquor; there is a liquor license. Then we’ve got the mall itself. There is an indication of interest on it. John, that’s why we are guardedly optimistic that we maybe can have that baby out of here by 06:30.

Jon Arfstrom – RBC Capital Markets

Okay. But when you say have it out of here, do you mean the entire --?

John Allison

Yes, sir.

Jon Arfstrom – RBC Capital Markets

The property, everything?

John Allison

Yes sir, all $5 million. If everything lines up right, we would hope that all $5 million would come out of the NPAs, yes.

Jon Arfstrom – RBC Capital Markets

Okay, great and then Randy, just a question for you though. The last quarter, you talked about the accretion from White River and possibly calling a trust preferred, possibly retaining the capital, can you just give us an update on that?

Randy Mayor

Yeah, we have basically decided, as Johnny said, the capital is king right now. Our trucks have switched from fixed to floating and with the rights where they are, they actually reduced our cost right now. So we have elected to at this point, just hold on to those trucks, until the market returns back to normal spreads, and we can issue again at a better rate or take advantage of the alternative there, but for right now, we are sitting on that and letting it float which is -- it’s tied to LIBOR plus 315 I believe.

Jon Arfstrom – RBC Capital Markets

Okay. And that’s in April, is that right, where it goes to 40?

Randy Mayor

Yes, it started floating in April, yes.

Jon Arfstrom – RBC Capital Markets

Okay, great. Thanks guys.

John Allison

Thanks Jon.

Operator

Next question comes from Barry McCarver from Stephans Inc.

Barry McCarver - Stephans Inc.

Good afternoon guys. Good quarter.

John Allison

Thank you very much Barry.

Barry McCarver - Stephans Inc.

First off, looking at the earnings per share in the quarter, lot of moving parts there. I believe in addition to the gains, there was an expense for the Metavante consulting. Could you help us get to have a core EPS run rate there please?

John Allison

Well, let me give you the numbers. You had about a $6.1 million one-time gain on White River. These are pretax numbers Barry. You had $380 million oil rack down with the liquor in the liquor store, $380,000 I’m sorry, $380,000 excuse me -- and we had additional reserves of about $3.6 million which is primarily Florida. We had a cyclic charge, $640,000 of the $850,000 Metavante study in the quarter which left a net there of about 1,400 and $1,481,000. If you tax that, I think you will come out with about $0.05 a share. So if you take all of the fluff out, the GAAP ROA was 1%, the cash ROA was 1.06% and the efficiency ratio came out at 60.1. So we reported 39. I'm afraid your going to raise our estimate for next quarter, which you probably will knowing you. We actually earned about $0.34, so it ended up being the best quarter in the company’s history ever, $0.34.

Barry McCarver - Stephans Inc.

$0.34, okay great. Secondly, moving back to the discussion on deposit rates and the margin, I'm looking at your interest rate analysis here. It really was more on the funding side, more so than deposits that helped out the margin. Is that -- I read that -- It looks like it bodes well for the next couple of quarters. You follow me?

John Allison

Yes, Randy you want to --?

Randy Mayor

We hope that’s the case. If you recall other -- few quarters back, we kind of made the choice to stay short with a lot of our funding and borrowing needs, anticipating rates to come down and everyone in a while you back in and you ride. Rates have come down and we have picked up a little bit longer money now and I think we are if not at the bottom pretty close to the bottom of the cycle, so hopefully we have made some smart choices there and that will help to benefit us going forward. Of course we won’t continue to have the increased pick up from that declining but probably we had locked in some longer term low rate money.

John Allison

We are able to pick up some five year money at 3%. We just didn’t pick up enough of it. We probably would have locked up and Han said I picked up more. That rate has jumped up 50 basis points here recently only at buying rates, so we were able to get some of that lower cost money and lock it in.

Barry McCarver - Stephans Inc.

Okay great and then just to two quick ones. I guess number one your observations on Centennial, now you have had them here for a full quarter and their progress towards that earn out they get at the end of the year, is that going well for them?

John Allison

Yeah, they think they are going to hit their target and if they -- we expect them to hit their target and they are optimistic that they will hit it, that they have got what -- risk how much guys?

Randy Mayor

Four.

John Allison

About $4 million at risk on that. So, they were owned target ahead of budget for the first quarter.

Barry McCarver - Stephans Inc.

And you mentioned in your commentary of on non-performing assets that I -- they showed a couple of million was having to do with their loans and came out of that carve out.

John Allison

That’s correct.

Barry McCarver - Stephans Inc.

And how much of that did they have? How much identified is left?

John Allison

We had -- we originally identified $8 million and set aside $2 million which we thought would be adequate for that loss. They have liquidated, so got rid off whatever you want to call -- half of that. They got about $4 million of that $8 million left at this point of time.

Barry McCarver - Stephans Inc.

But the piece that your talking about and that’s the amount of the loans, not the – you’re talking about there is $2 million of loss reserve for that, not $2 million in the loans you carved out this quarter right.

John Allison

That’s correct, that’s correct and of that $4 million that’s left in the loan side Barry $2 million is non performance, is that correct Ron?

Randy Mayor

Yeah, Barry there is credit in payable that you probably know about, $1,911,000 million, it’s office complex and it’s in foreclosure and they are optimistic that there will be little loss in that but yes sir, it is part of the carve out and those moneys that we set aside would go against any loss there, so if they are down to $4 million in theory and half of that was in that one credit, they have done an unbelievable job in 90 days.

Barry McCarver - Stephans Inc.

But either way it doesn’t affect Home BancShares shareholders.

Randy Mayor

That is correct. We are insolated from that. That is correct.

John Allison

It’s on their ticket it’s not our ticket. So I mean even though we have to report that $2 million in non-performing it’s not on our ticket Barry.

Barry McCarver - Stephans Inc.

Okay and then just lastly it sounds like you are done with De Novo branching for little while. Is that the original game plan or is that a reflection of the economic environments from your markets.

John Allison

Well, as we -- your right there, we have slowed down on De Novo branching. However we probably as we said in the past we will continue to look in the Fayetteville Shale Play for opportunities that are our player. So the last thing we opened was in Molton; these are pretty inexpensive branches. That was in a grocery store and we have two of our manufactured homes in the Fayetteville Shale Play that we are presently using and we have a third manufactured home being renovated now that will be ready to go into that Fayetteville Shale, but that’s pretty inexpensive entries Barry.

Barry McCarver - Stephans Inc.

Well, when you talk about opportunities, are you including acquisitions in addition to branch acquisitions?

John Allison

Well, there are going to be and I was going to talk about that in my conclusion but you know this Company is very conservative with almost $300 million in capital and $100 million in excess capital in an environment that we think there is going to be lots and lots of opportunities. So our powder is dry and we are looking -- we don’t have to have a genie diamond deal but we need something pretty close to it, so we are looking, our phone is ringing, banks do -- several banks in trouble. I think there might be some failures and this Company is ready to move if there is an opportunity for us. I think you remember the assisted transaction that happened in the late ‘80s and early ‘90s and how profitable those were for financial institutions and this Company is poised to move on the right opportunity.

Barry McCarver - Stephans Inc.

All right. Thanks a lot, guys.

John Allison

Thanks Barry.

Operator

Our next question comes from Charlie Ernst from Sandler O’Neill.

Charlie Ernst - Sandler O’Neill

Good afternoon to you guys.

John Allison

Hi Charlie.

Charlie Ernst - Sandler O’Neill

I had to step away for a second, so hopefully you haven’t addressed this, but can you just talk about the Florida portfolio a little bit. I think some people are concerned about that; some, but obviously it hasn’t shown up at all. Can you just sort of size that and say what the NPAs are in that portfolio and add any other color you might have there?

John Allison

The majority of the NPAs are in the Florida portfolio. Probably 75% of our NPA is outside of the Centennial NPAs which is on their ticket. The $2 million Centennials are on their ticket and I'm going to say that they are running that number for you now but as we have said in the past, that market grew faster than it should have gone class wise and it’s going to come down. So, I mean we got a house down there, Ron said we got another little project down there, we got some – we are just getting out in front of it. 65% of the NPAs are in Florida.

Charlie Ernst - Sandler O’Neill

Can you say how big that portfolio is, the overall portfolio in Florida?

John Allison

That’s about $300 million.

Charlie Ernst - Sandler O’Neill

$300 million. Okay, and how does that break down sort of by product type? You don’t have to be exact. I am just kind of thinking about a figure.

John Allison

Primarily Marinas, motels; What is it? I keep saying it, mall is that one there. Non-farm and non-residential $144 million; construction and land development, $53 million; [inaudible] for a family $93 million; consumer, $9 million; C&I, $17 million; that’s about it Charlie.

Charlie Ernst - Sandler O’Neill

Okay, great. Alright, I appreciate it guys.

John Allison

Okay, thanks.

Operator

Our next question comes from [Joe Stephan] from Stephan Capital.

Joe Stephan - Stephan Capital

Hi guys.

John Allison

Joe?

Joe Stephan - Stephan Capital

How are you doing Johnny?

John Allison

I'm doing good. I haven’t emailed you back on that little device you sent me on that email the other day, but I will.

Joe Stephan - Stephan Capital

Okay, I got a question for you because it’s just trying to clarify some of these points and they are good points. The -- hopefully the NPA you are going to get off at the end of June which is almost $5 million, that’s all in foreclosed, isn’t it John.

John Allison

Yes.

Joe Stephan - Stephan Capital

Okay that’s in foreclosed, okay.

John Allison

It’s in other -- Joe to be specific it’s in other real estate owned.

Joe Stephan - Stephan Capital

Okay, which is essentially if you get rid of that your Orio is almost -- it will be close to zero.

John Allison

Agreed.

Joe Stephan - Stephan Capital

Okay but then you are talking about some other non-performing loans which I am assuming were not accruals that could be coming. That’s what -- I just want to make sure I was not getting the two mixed up.

John Allison

Yeah you are correct. I mean as they move through the pipeline they would meet the past news Johnny talked about.

Joe Stephan - Stephan Capital

Okay

John Allison

They would go non-performing. Yes, the $2.4 million home down in Florida, if we are successful in that foreclosure, it would move from the NPA into Orio.

Joe Stephan - Stephan Capital

Right

John Allison

NPL

Joe Stephan - Stephan Capital

NPL.

John Allison

Yes, sir.

Joe Stephan - Stephan Capital

Okay, okay.

John Allison

I mean it’s just -- I mean it’s a house here and a house there. I mean that the gas, the house the triple forming in the house was an airline pilot who loss his job.

Joe Stephan - Stephan Capital

Right

John Allison

The great credit 750 credit store right, great customer, lost his job.

Joe Stephan - Stephan Capital

But you had said though that some of these you are getting ready to move them up pretty quickly anyway, so in actuality you might people that predict in the Orio and a pretty sharp reduction in the MPO potentially on top of that.

John Allison

If, I am getting my hands on them with a 1.99 reserve to loans, they’ll be gone.

Joe Stephan - Stephan Capital

Okay.

Randy Mayor

And other thing to look at Joe is we are very aggressive in providing for these and everything, you kind of got to look at our loss ratio and go back and look and see what our net charge offs have been over the period. Our people do an excellent job once it gets to liquidating that and trying to mitigate the loss.

Joe Stephan - Stephan Capital

Okay guys thank you.

John Allison

Thanks Joe.

Operator

Our next question from David Scharf, FTN Midwest Securities.

David Scharf - FTN Midwest Securities

Hi guys how are you doing?

John Allison

Fine David how are you doing?

David Scharf - FTN Midwest Securities

I am very well thank you. Most of my question have been answered but I do want to kind of follow up on that the sale and how your position yourself and mainly when do you expect or when should we expect to start to see some of these massive benefits or massive investments flow to, to the community bank level and particularly your balance sheet.

John Allison

Guys, this is Ron, I’ll take it. We are already seeing it. We have our pipeline -- I mean I won’t give you the actual numbers but our loan committees have been going to be about three hours long and we have a strong pipeline and the bookings are already showing up. Part of that $62 million growth in loans or warehouses, we are financing the vendors that bunny described with the particular product that we are using. They might be gathering lines, they might be providing diesel fuel to these drilling units but it is showing up, it’s in our loan numbers already and Conway I don’t think has a single square foot of empty warehouse space. All the hotels are full so we are definitely already seeing the effect.

David Scharf - FTN Midwest Securities

And what’s being considered right now for future development of hotels and warehouses? Has that been released or how are you thinking about he growth around you know Conway?

John Allison

Johnny we -- there is a new hotel coming in, they were bidding on the finance you know, confident that the warehouse builder receiver will be looking for opportunities to build additional warehouses as the companies continue to come in but like Ron said I think our residential real estate was off one half of 1%; the prices in this area, so it’s holding up very well. We were just visiting one of our builders there out. I figured he had about six months before he died, so seven houses in the last week, so some good things are happening in the market and I think we are seeing the benefit. I think we are seeing lots of benefit that we can put our hands on that are actually our motels, our restaurants, our homebuilders and we are just seeing lots of that happening. The stronger they get, the stronger we get.

David Scharf - FTN Midwest Securities

Okay, and then --

Randy Mayor

Just to reiterate, just once second, to what Bunny said that the company HTO that he talked about has wired about $660 million in the purchase of lease rights in just the last three months. So, to give you an idea of their investment and they are a new player.

David Scharf - FTN Midwest Securities

Yeah, that’s a big number and then I haven’t ready anything that talked about this, but there is a certain price of oil that has become less profitable for this to be pulled out of the shell using the technology that -- I guess the horizontal technology.

John Allison

Yes, it’s between $6 and $7 a 1000 cubic. If it drops below there, yeah, it’s not worth it, anything about that, they are making money.

David Scharf - FTN Midwest Securities

How is that related to a barrel or is that not the proper way to look at it?

John Allison

This is not –- they are -- what Bunny said, these are Mcfs and that’s how they are gauged.

David Scharf - FTN Midwest Securities

Got you.

John Allison

David, I don’t know. I think the story is, it is not profitable below $6, but it went below $6 and I never saw any slow down in activities, so I won’t -– I question it somewhat.

Randy Mayor

It’s the efficiency David. The technology they are using out there today with these horizontal units is just amazing and it cost significantly less to drill a well in Arkansas than it does in the Barnet Flood.

David Scharf - FTN Midwest Securities

And is that based on the land value or the mineral rights that there are…

John Allison

The depth of shale.

David Scharf - FTN Midwest Securities

I see, okay. Well, I guess that’s it. Well, maybe one follow-up is on. You mentioned capital and I know you do have this repurchase program out there that I suspect you won’t really be using, but I just wanted to clarify that. Are you going to start repurchasing shares or you just want to keep the powder dry for opportunist acquisition?

John Allison

Actually I think that’s the reason we impaired the trust preferred. I think the opportunities at this point in time outweigh paying off the trust preferred or repurchasing stock today.

David Scharf - FTN Midwest Securities

Okay.

John Allison

That may change and if it does, we are certainly willing to do it and we’ll be buy back stock, but as of right now, if we can get some empty out of season assisted transactions, we may look at those.

David Scharf - FTN Midwest Securities

Do you have any idea when you expect to see a tick-up of that or I mean are there several banks that are on the costs that your just waiting for the go-ahead?

John Allison

Have you ever heard, I can’t talk about that.

David Scharf - FTN Midwest Securities

Yeah, fair enough. Got you, but thank you very much for your time, I appreciate it.

John Allison

Thanks David.

Operator

Our next question comes from Tom [Ferney] from Decade Capital

Tom Ferney - Decade Capital

Hi, good afternoon guys. I apologize I was kind of jumping on and off the call but I'm curious on the comments, with regard to NTLs, I think last quarter you had put out a range there at some point, you can hit sort of the 60 basis points to 2% is -- and obviously came in the lower end of that range this quarter. Is that view unchanged or how do you look at that and what do you think about the overall asset quality picture and how are you looking at that thing?

John Allison

Well, asset quality is remaining good. We were on the lower end of the right which we are pleased to be. If we liquidate and if you have been bouncing on and off, we think that the $5 million liquor store, we are optimistic that if we continue to own the right we owned, that will be half a buy by the end of the quarter. It looks like we have some activity on it. Hopefully, that will work out, but that will certainly be out by the end of the third quarter, so that should pull that down. I guess we are too honest sometimes. When you look out there in the world, you got some builders out there that build. I met someone the other day and he said I’ve got about 18 months before I die. So, I mean he’s strong. He’s got 18 months before he dies, if the market picks up then he’ll be fine, if he doesn’t then he’ll know then he’ll die, so I guess that’s kind of the question and we put the range out there to encompass a range from 0.6% to 2%.

Tom Ferney - Decade Capital

So basically that range is still applicable?

John Allison

Still applicable?

Tom Ferney - Decade Capital

Okay, thank you.

Operator

(Operator Instructions) and it seems there are no further questions at this time.

John Allison

Okay, let me sum it up here just a little bit here for you and we thank that Home BancShares has a great future. The path of economic growth and the path we sale as Bunny describes, it could be as much as a $140 billion. Strong loan growth of $67 and strong loan path land -- the path land is actually shaping up to what I consider very strong if it continues to build at the rate its building. Deposit growth -- good strong deposit growth, the best we have had in three or four years, non-interest income grow and improved efficiency ratio. As you know we have been barked on, spent $850,000 on a efficiency study to trying to pull our efficiencies to the mid 50.

Strong asset quality, strong loan reserves of 1.99 reserves that ranks us fifth in the nation of 241 banks over $1 billion that are profitable Home BancShares rank sixth. Strong loan and deposit ratio continue to improve margins in turbulent times improving return on assets, improving return on -- improving EPS and strong capital with almost $300 million in capital and a $100 million in excess capital. In this kind of environment we think there will be lots of opportunities out there.

Stock holders equity grew 24 9% over the past year and book value increased $13.69 to $15.62. Record earnings and we did that without bleeding loan loss reserves and we did that without buying back stock. In conclusion I just like to say that this -- we are very proud as a management team and the accomplishments, whether we have been good or lucky, Home BancShares have been ranked in the top class companies in the Bank South-East group by investor business dailies, stock check up analysis many times this quarter and if you’ll check it today you will find Home BancShares has ranked best in the group number one out of 144 South East banks. We are proud of that, that’s right on -- based on overall ranking, technical ranking, fundamental rankings and attractiveness ranking. So, just thought it was a little tit bit, it’s a little aside but we are proud of that. We appreciate your confidence and your support of this Company and will continue to work very hard and we will talk to you in 90 days. Thank you

Operator

Thank you. That does conclude today’s conference. You may now disconnect.

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Source: Home BancShares, Inc. Q1 2008 Earnings Call Transcript
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