Home BancShares Inc (HOMB) 2008 Q1 法說會逐字稿

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. The Company participants will begin with prepared remarks then entertain questions. (OPERATOR INSTRUCTIONS). The Company participants in this call are -- John Allison, Chief Executive Officer; Bunny Adcock, Vice Chairman; 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 note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in March 2008. At this time, all participants are in a listen-only mode and this conference is being recorded. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the call over to our first participant, Mr. Allison.

Thank you Amy, I appreciate it. Good afternoon, and welcome to our first quarter earnings and conference call. Since the last time we spoke what history may record is some of the most stressful financial times in many many decades. Billions of chargeoffs, record foreclosures, locked up credit markets, oil over $110 a barrel, major economic slowdown, discussion about whether we are in recession or not, we happen to think we probably are, banks having to raise billions in new capital in order to maintain strong capital ratios, major drops in interest rates and thrashing of the U.S. dollar. Strange things happened that I've never seen in my business life over 40 years and I don't think it's over yet. But with the Jamie Diamond 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 a 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 king. I trust you have seen our earnings release. And even though the quarter was very busy with the introduction of Centennial Bank, our acquisition out of Little Rock, by the way, was accretive for the quarter. Good job, guys. And our one time gain from White River BancShares of $6.1 million. Also on the expense side we had the Metavante efficiency study that we discussed in the last call, very expensive study and we took the majority of that expense this quarter. We continue to build reserves in our liquor store Oreo 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 without all the noise to the quarter it was a record quarter on a same store basis and it is the best quarter in the Company's history. Let's go to the numbers. They are a little frayed as a result of all the, as referred to, as the noise in here, but we'll clear that up before 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 cash earnings likewise was up 50% or $2.6 million from $5 million to $7.6 million. Cash EPS went from 29 to 40, up $0.11, which equated 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. These numbers skew a little bit as a result of the gains. That's 140% and diluted EPS was up 31 -- from $0.31 to $0.39, up $0.08 or 103% Cash earnings likewise up 1.9 million, 134% to 7.6 million and cash diluted EPS was $0.40 versus $0.33.

Centennial, our acquisition in the first quarter, made about $578,000 and was flatly accretive to the company for the quarter. Net interest income was up 47 -- I mean 4.7 million or 29.7% to a record 20.8.million and loan loss provision, as we build loan loss provisions when we think it is appropriate, we put, first quarter last year we put in 820,000, we put in 4.8 million in loan loss reserve. I would have put in more but that's all the accountants would let me put in. Non-interest expense -- noninterest income was up from 6.2 to 13.5, an increase of 7.3 million. That's primarily as a result of the 6 million gain, that's 118%. Non-interest expense grew likewise by 4 million and we had the Metavante charge in there. We'll talk about that more in a minute. Net interest margin, surprisingly in these crazy times, we were 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%. Even without Centennial in the picture, the core banks would have grown at 13.6%. Again on loan loss provision we put 1.2 million in the fourth quarter and 4.8 in this quarter up 3.6 million. Non-interest income on a linked quarter basis from 6.7 to 13.5, that's up 6.8 primarily as a result of the $6.1 million gain. Margin for the quarter on a linked quarter basis increased 17 basis points, a favorable 17 basis points and Randy Mayor will talk more about that in the future. Centennial came in for the quarter with a 3.96, so our new addition helped pull that a little bit. Return on assets, we are 115 on a GAAP basis versus 88 last year for the March quarter and cash ROA was 122 versus 95, up 27 basis points, but that has got some of the gain in it.

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 event for the company. Cash tangible ROE for the year, for the first quarter was 13.53 versus 10.96 for the first quarter of last year and efficiency ratio dropped from 6252 to 5194. 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 0.94 the last quarter of the year to 115 this year and on cash from 101 to 122 and likewise on cash tangible ROE went from 10.98 to 13.53 and efficiency went the fourth quarter we pulled that down, we told everybody to model us in the low 60s. Our goal is to get it in the mid 50s, but fourth quarter we were 60.54 and we are 51.94 for this quarter. Loans, strong loan demand continue strong loan growth, that's kind of been the driver of the Company, up 391 million or 26.5%.

Total assets grew 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. That's 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 additional 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 Companywide we grew 262 but 83.7 of that came from same-store sales and was an increase of 21%. We are seeing money come to the banks. I don't know if it's a flight 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 of their money market accounts are backed by subprime mortgages and it certainly appears to be a flight to safety right now and I hope that continues. Stockholders equity grew to 286 million up 33 million for the quarter as we brought in Centennial. And loan to deposit ratio decreased slightly 27 basis points, as for the first time in a long time deposits out stripped loans. And last, the loan lost reserve. We have 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 past due 30 days or more, including past due 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 a little over $2 million, actually we identified about $8 million worth of credit that we had a disagreement over, so we set aside monies on that transaction to cover those in the event that those loans do not perform. If they perform and we accept them, that's fine. If they don't and there is a loss incurred, it comes out of that portion of the monies. So that was about $2 million of it. If you take the -- we are presenting a 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 drop to 0.54, which was below the low end of our range and nonperforming assets to assets we reported at 0.67. If you pull that 2 million out again it drops to 0.59. So we weren't happy with the increase in non-performing but it is certainly manageable. Branches opened during the first quarter of '08 is Cabot, Arkansas, our Community Bank who continues to be running very, very well. Is doing an excellent job, is open a new branch in the Cabot area. And then Marlton, Arkansas, as we said before, we'd continue to move further up into the Fayetteville Shale Play and we'll 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 is going on in that dynamic market. That concludes most of my prepared remarks other than the summary, and as usual we are going to go to Ron Strother, who's the loan guru for the company, and let him give us a loan portfolio update. Ron.

Thank you Johnny. Let me start with volume. I'm going to cover three things, volume, mix and asset quality. As John indicated our first quarter loan growth was very nice. We reported loans up about 62 million or 15.56% annualized on a 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 in fairness a bit slower in our other markets. Just as a footnote on the volume, in the first quarter 84% of all the 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 lender. Total loans secured by real estate on the last call was 81.1. At quarter end Q1 '08 it had 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 nonfarm nonresidential grew. We continue to be comfortable with this mix and the pipeline substantially reflects that philosophy. Let me move to asset quality. Johnny's already touched on it. I just want to make a couple of other comments. The NPAs did increase but it was anticipated, with some Florida credits going non accrual, but correspondingly we increased the provision for loan loss to help cover any perceived exposure there. 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 is about a $5 million figure in the NPAs and we hope it to be gone at the 6/30 call. I just want to make a comment on the NPAs 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's secondary source of repayment. If conditions have changed we downgrade it 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 NPAs are at the lower end of the range previously communicated.

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

As Johnny had mentioned earlier our net interest margin did improve 17 basis points on a linked-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 a 51 basis point improvement on interest bearing liabilities, which dropped from 401 to 350. 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 improvement. In the last couple of calls I've tried to give a little bit of forecast or color on what I thought was going to happen to the margin and in both instances I was thinking we would see a squeeze, but in both instances I've been proved wrong. So I think I'm going to quit trying to predict the future and just report on what is happened in the quarter on a go forward basis. With that, Johnny, that's all I've got.

Thank you Randy. I think you said we were negatively GAAP'd and in the year's range, it would play to us but in the next two quarters if you call it you thought we would get a little squeeze and we have been able to widen the margin. So that is good news. With us today is our Vice Chairman, Robert H "Bunny" Adcock and he's going to talk to you a little bit and tell you the update on the Fayetteville Shale. Bunny.

Thank you, Johnny. A couple of months ago Johnny asked me to give a presentation on the Fayetteville Shale formation and the economic impact that it would have on our five counties at our annual meeting. The reason this is significant is that we have facilities located in four of those counties and that 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 and Economic Research released a report that had been funded by the natural gas producing companies. I spent the past couple of months studying the report and I have actually interviewed the author of this extensive report. The report stated that the companies will invest about $12.5 billion and this will result in a total economic impact of $18 billion.

Yesterday morning I picked up the Arkansas Democrat Gazette and I read natural gas companies' future spending will make completely irrelevant a recent study on the economic impact of drilling in the Fayetteville Shale in north central Arkansas. The observation was made by Aubrey McClendon , Chesapeake Energy Corp Chief Executive. He said the companies will spend between $75 billion and $100 billion in the next decade. It really can be transformative, McClendon said. Well, obviously, I've wasted too much pouring over this data from the University of Arkansas report. Now, the question is what caused these two divergent opinions. First of all the University of Arkansas were using last and previous years figures of $6.20 for 1000 cubic feet in their study, where the market today is about $10.20 per 1000 cubic feet.

Last month the legislature passed and the governor signed our [severn] tax bill. Of course this lifted the uncertainty that had held up a lot of the investments. Also the production company's indicated the wells production numbers have been better than they had expected. Also there have been two announcements since the study was completed indicating more activity than we had previously thought. First was XTO, XTO Energy announced the acquisition of 55,631 leasehold acres for $520,000 million. That will take XTO to a total of 300,000 net acres. Next was Petrohawk Energy Corporation purchased 18,500 acres for $222 million. This acquisition will bring the (inaudible) base of Petrohawk total leasehold in Fayetteville Shale to about 150,000 acres.

Now if Mr. McClendon 's statements are even partially accurate, the Fayetteville Shale Play is going to be transformative. The University's report had forecasted 12,000 new jobs. With Mr McClendon's report this could triple or quadruple. Reported forecast $185 million in property taxes, same thing, it could triple or quadruple. The Department of Finance Administration had forecasted $100 million per year in severance taxes and again, this could go up considerably. If we use McClendon's optimistic number of 100 billion of investments, applying the University of Arkansas' multiplier, the economic impact on our five counties could be as high as $140 billion. Johnny, that's my report.

Good report, Bunny. That's exciting for us. At this point in time, Amy, are you with us?

Yes, I am. I'm sorry. Are you ready for questions then?

I think you were taking a nap on me, Amy.

I was double muted.

Okay. We are ready for Q&A if anybody has any, if you would go through that.

(OPERATOR INSTRUCTIONS). Our first question will come from Charles Arfstrom from RBC Capital Markets.

Hi, guys. Jon Arfstrom here.

Jon, good afternoon.

Yes. Good afternoon. Thanks for that information on the Fayetteville Shale. One of the things that comes to mind is what kind of competitive reaction are you seeing from other banks? Are you seeing others set up shop in the area or do you still feel like you can maintain the dominant market share that you have?

Jon, we haven't -- our market share continues. It grew last year in the market. There's really no competitors. Ron, we didn't see 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 Jon.

You should keep quiet, then.

Well, it really -- as you heard Bunny's report, it is very exciting and one of the engineering firms that is moving in here said they would be here for 30 years. This play is not short-term, it's long-term.

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 stack up against your competitors.

I am going to let Randy take that one.

Jon, it is coming into most of our banks pretty much. Breakdown, I think Twin City probably saw the majority of that with some good growth in both Marine and Centennial and First State, and the rates, as far as -- there's been a little bit written, I think Barry has written a few things that deposit pricing has returned to normal basically in 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 quite a bit below the brokered rates out there. I think it is general, as Johnny said, might be a little bit of a flight to quality. The stock market shake up has brought some people back to the banks and CD market. We are able to grow deposits at a reasonable rate there.

Okay. And, Ron, can you talk a little bit about what else or what you took into the non-performing loan category, just generally what the credits are like?

Yes. Jon, it is principally in Florida market. There was a single family house where the folks were in it for a while. It is pretty substantial. It's a very very nice house, and I think you maybe had a look at that when you were down there. A beautiful property. There was another future development on some five units that we took in that went non accrual for the quarter but it's not any one particular large project. It's made up of a number of properties principally in the Keys.

In terms of the REO, is that the Key Largo strip mall that is in REO?

Yes.

Yes. We refer to it as the liquor store. We have an indication on that. To put a little more color, about $300,000 plus for the liquor. There is a liquor license. Then we have got the mall itself. There's an indication of interest on it. Jon, that is why we are guardedly optimistic that we maybe can have that baby out of here by 6/30.

Okay. When you say have it out of here do you mean the entire, the property.

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

And then, Randy, just a question for you. 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?

We have basically decided, as Johnny said, that capital is king right now. Our [trucks] have switched from fixed to floating and with the rates 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 them again at a better rate or take advantage of a 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.

And that's an April event, is that right, where it goes to floating?

Yes, it started floating in April.

Thanks guys.

Thanks Jon.

The next question comes from Barry McCarver from Stephens Inc.

Good afternoon, guys. Good quarter.

Thank you very much, Barry.

I thought in a recessionary period liquor was supposed to be in high demand.

If I'd known that is all I was going to get out of it, I believe I would drink it all myself.

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

Well, let me give you the numbers. You had about a $6.1 million one time gain on White River. These are pre-tax numbers, Barry.

Yes.

You had a $390 million OREO write-down on the liquor in the liquor store.

$380,000.

$380,000. What did I say, 380 million? $380,000, excuse me. And we had additional reserves of about 3.6 million, which was primarily Florida. We charged 640,000 of the 850,000 Metavante study in the quarter, which left a net there of about 1400 -- 1.481 million. If you tax that, I think you'll come out with about $0.05 a share. So if you take all 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 you are going to raise our estimate for next quarter. We actually earned about $0.34, so it ended up being the best quarter in the Company's history ever.

$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. If I read that it looks like it bodes well for the next couple of quarters. Do you follow me?

Yes. Randy, do you want to -- ?

We hope that's the case. If you recall, a 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 every once in a while you get lucky and you are right. Rates have come down and we have picked up a little bit longer money now and I think we're, if not at the bottom, pretty close to the bottom of the cycle. So hopefully we've made some smart choices there and that will help to benefit us going forward. Of course we won't continue to have the increased pickup from that declining but hopefully we've locked in some longer term lower rate money.

We were able to pick up some five-year money at 3%. We just didn't pick up enough of it. We probably would have liked to, in hindsight, picked up more. That rate has jumped up 50 basis points here recently on that borrowing rate. We were able to get some of that lower cost money and lock it in.

Great. And then just two quick ones. I guess number one, your observations on Centennial now that you've had them here for a full quarter and their progress towards that earnout they get at the end of the year. That going well for them?

They think they are going to hit their target. We expect them to hit their target and they are optimistic that they will hit it. They've got risk -- how much guys? About $4 million at risk on that. So they were on target ahead of budget for the first quarter.

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

That's correct.

How much of that do they have? How much identified is left?

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

But the piece that you are talking about, that's the amount of the loans. You are talking about, there is $2 million in loss reserve for that not 2 million in the loans you carved out this quarter. Right?

That's correct. That's correct. That's correct. And of that $4 million that's left in the loan side, Barry, $2 million is non-performing. Is that correct, Ron?

Yes. Barry, there is a credit in Fayetteville that you probably know about, $1.911 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 monies that we've set aside would go against any loss there. So if they are down to $4 million, in theory, and half of that is in that one credit, they have done an unbelievable job in 90 days.

But either way it doesn't affect Home BancShares shareholders?

That is correct.

We are insulated from that. That is correct.

It is on their ticket, it is not our ticket. So, even though we have to report that 2 million in non-performing, it is not on our ticket, Barry.

Awesome. And then just lastly, it sounds like you are done with de novo branching for a little while. Is that your original game plan or is that a reflection of the economic environment, some of your markets?

You are right that we have slowed down on de novo branching. However, we probably, as we have said in the past, will continue to look in the Fayetteville Shale play for opportunities that are up there. So the last one we opened was in Marlton. 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.

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

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 powdered is dry and we are looking -- we don't have to have a Jamie Diamond deal, but we need something pretty close to it. So we are looking. Our phone is ringing. Banks, there are several banks in trouble. I think there may 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.

All right. Thanks a lot guys.

Thanks Barry.

Thank you.

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

Good afternoon, you guys. 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. 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 that you might have there?

The majority of the NPAs are in the Florida portfolio. Probably 75% of our NPAs 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've said in the past, that market grew faster than it should have gone crosswise and it's going to come down. So we have got a house down there with Bronson. We have got another little project down there. We have got some -- we're just getting out in front of it. 65% of the NPAs are in Florida.

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

It's about $300 million.

$300 million. Okay. And how does that breakdown sort of by product type? It doesn't have to be exact. I am just kind of thinking round figures.

It is primarily marinas, motels -- where is it? I can't see, my arms are not long enough. Nonfarm, nonresidential 144 million, construction and land development 53 million, one to four family 93 million, consumer 9 million, C&I 17 million. That's about it Charlie.

Okay. Great. Appreciate it, guys

Thanks.

Our next question comes from Joe Stieven from Stieven Capital.

How are you doing, Johnny?

I'm doing good. I haven't e-mailed you back on that little device you sent me on that e-mail the other day but I will.

I have got a question for you because it's just trying to clarify some of these points and there are good points. Hopefully the NPA you are going to get off at the end of June, which is almost $5 million, that is all in foreclosed isn't it, John?

Yes.

That's in foreclosed.

Joe, to be specific, it's in other real estate owned.

Which is essentially if you get rid of that your OREO is almost, it will be close to zero.

Agree.

But then you were talking about some other non-performing loans, which I'm assuming were not accruals that could be coming. I just want to make sure I was not getting the two mixed up.

Yes. You are correct. It's a move through the pipeline, that would be the past dues Johnny talked about, 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 an NPA into OREO. For an NPL it would move to non-performing loan, yes, sir.

It's a house here and a house there. The 2.4 million house was an airline pilot lost his job. Great credit. 750 credit score. Great customer, lost his job.

You had said, though, that some of these you are getting ready to move them out pretty quickly anyway. So in actuality, you might see both a reduction in the OREO and a pretty sharp reduction in the NPLs, potentially on top of that.

If I can get my hands on them with a 1.99 reserve to loans, they will be gone.

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

Thank you.

Thanks Joe.

Our next question comes from David Scharf from FTN Midwest Securities.

Hi, guys, how are you doing?

Fine, David, how are you doing.

I'm very well, thank you. Most of my questions have been answered but I did want to kind of follow up on the shale and how you position yourself and mainly when do you expect, or when should we expect to start to see some of these massive benefits or massive investment flow to the Community Bank level and in particular your balance sheet?

This is Ron, David, I'll take it. We are already seeing it. We have, our pipeline -- I won't give you the actual numbers but our loan committees have been going about three hours long and we have a very strong pipeline and the bookings are already showing up. Part of that $62 million growth in loans are warehouses. We are financing the vendors that Bunny described with a 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.

And what's being considered right now for future development of hotels and warehouses? Has that been released? How are you thinking about the growth around Conway?

David, Johnny. There is a new hotel coming in that we are bidding on the financing on. Confident that the warehouse builders here 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 0.005% the prices in this area, so it is holding up very well. We were just visiting one of our builders who 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't put our hands on that are actually our motels, our restaurants, our home builders that we are just seeing lots of that happening. The stronger they get, the stronger we get.

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

It's a big number. And then I haven't read anything that talked about this, but there is a certain price of oil that it becomes less profitable for this to be pulled out of the shale using the technology, I guess the horizontal technology.

It's between $6 and $7 a thousand cubic feet. If it drops below there, it's not worth it. Anything above that they are making money.

How does that relate to a barrel, or is that not the proper way to look at it?

What Bunny said, these are Mcfs and that is how they are gauged.

David, I don't know, I think the story is is that it is not profitable below $6, but it went below $6 and I never saw any slowdown in activity. So I question that somewhat.

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 Barnett play.

Is that based on the land value? For the mineral rights?

The depth of the shale.

Okay. I guess that's it. Maybe one follow up. 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 wanted to clarify that. Are you going to start repurchasing shares or you just want to keep the powder dry for opportunist acquisitions?

Actually think that's the reason we didn't play out the trust preferred. I think the opportunities at this point in time outweigh paying off the trust referred or repurchasing stock today.

Okay.

That may change, and if it does, we are certainly willing and will buyback stock. But as of right now if we can get some FDIC assisted transactions we may look at those.

Do you have any idea when you expect to see a pick up of that? Are there several banks that are on the cusp that you are just waiting for the go ahead?

Have you ever heard I can't talk about that?

Fair enough. Got you. Thank you very much for your time, I appreciate it.

Thanks David.

Our next question comes from Tom (inaudible) from 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 NPLs 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% 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 now, how are you looking at that? Thanks.

Well, asset quality is remaining good. We were on the low end of the range which we are pleased to be. If we liquidated -- if you had been bouncing on and off we think that the $5 million liquor store we are optimistic that if we continue on the route we are on that will be out by the end of the quarter. It looks like we have some activity on it and hopefully that will work out. If it doesn't, we'll certainly be out by the end of the third quarter. That should pull that down. I guess we are too honest sometimes when you look out there in the world, you have got some builders out there that build. I visited one the other day and he said I have got about 18 months before I die. I mean he is strong, he has got 18 months before he dies. If the market picks up then he'll be fine. If it doesn't, then he will 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%.

So basically that range is still applicable?

Still applicable.

Thank you.

(OPERATOR INSTRUCTIONS). It seems we show no further questions at this time.

Okay. Let me sum it up here just a little bit for you and why we think that Home BancShares has a great future. The powerful economic growth in the Fayetteville Shale, as Bunny described, it could be as much as $140 billion. Strong loan growth of 67 million and strong loan pipeline. The pipeline is actually shaping up to what I would consider very strong if it continues to build at the rate it's building. Deposit growth, good strong deposit growth, the best we've had in three, four years. Non-interest income growth and improved efficiency ratio. As you know, we've embarked on -- spent $850,000 on a efficiency study to try to pull our efficiency to the mid 50. Strong asset quality, strong loan reserves of 1.99 reserves that ranks us sixth in the nation of 241 banks over $1 billion that are profitable, Home BancShares ranked sixth. Strong loan to deposit ratio continued 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 $100 million in excess capital.

In this kind of environment we think there will be lots of opportunities out there. Stockholders equity grew 20.9% over the past year and book value increased 13.69 to $15.62. Record earnings and we did that without bleeding loan lost reserves and we did that without buying back stock. In conclusion, I would just like to say that we are very proud of this management team and the accomplishments. Whether we've been good or lucky, Home BancShares has been ranked in the top five companies in the bank southeast group by Investor Business Daily's stock check up analysis many times this quarter. And if you will check it today, you'll find Home BancShares has ranked best in the group, number one out of 144 southeast banks. We are proud of that. That is ranked on -- based on overall ranking, technical ranking, fundamental rankings and attractiveness ranking. So just thought was a little tidbit, a little aside but we are proud of that. We appreciate your confidence and your support of this company and we'll continue to work very hard and we'll talk to you in 90 days. Thank you.

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