Home BancShares Inc (HOMB) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated fourth quarter 2008 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company's participants will begin with prepared remarks and then entertain questions. (Operator Instructions). The Company participants in this call are John Allison, Chief Executive Officer, Ron Strother, Chief Operating Officer, Randy Mayor, Chief Financial Officer, and Brian Davis, Investor Relations officer.

The Company has asked me to remind everyone to refer to the cautionary note regarding forward-looking statements. You will find this note on Page three of their Form 10-K filed with the SEC in March of 2008. At this time, all participants are in a listen only mode and this conference is being recorded. (Operator Instructions). It is now my pleasure to turn the call over to our first participant, Mr. Allison.

Thank you, Camille. Good afternoon, ladies and gentlemen, and welcome to the fourth quarter earnings report for Home BancShares. During the third quarter conference call, I said the fourth quarter of '08 and the first quarter of '09 would be a little noisy, but I didn't expect them to be quite this noisy and the noise in Florida was more than we thought and warned about. We're known for having a straightforward style, no BS, when dealing with asset quality. If a problem exists, we deal with it. It is what it is, good or bad.

Our Arkansas asset quality, which is 85% of our total loan portfolio, has been excellent. There have been only a small number of problem credits in Arkansas. Our problem has been Florida, which represents only 15% of our total loan portfolio. The problems resulted from a slowdown in economic activities in the Florida market. Our Company has dedicated strong resources to both the loan and loan review process in Florida.

Effective December 5, Moraine was merged into Conway Centennial Bank, and the Florida assets are now on the watch of one of our star CEO's, Randy Sims, and Kevin Hester has assumed the Chief Lending position at Moraine. Ron Strother, also Chief Operating Officer, attends all loan committees either by phone or in person, and in addition, the Head of our loan review for Arkansas for 9.5 years, Marisa Langford, has moved to Florida and will be instrumental in overseeing all loans in the Florida region. A former bank regulator herself, she takes no prisoners.

We reported a $9.4 million loss for the quarter and we have to talk about the components of it. I think they are in the press release but maybe I can add a little color to these components. Number one, we took a $20 million provision for loan loss, and we charged off about $15.4 million of which nearly all of that came from Florida, the charge-offs but we replenished the loan loss reserve with about $20 million and Ron will add a lot more color on that in a little bit. but we took loan loss reserves to a record 2.06%. We've warned you or discussed merge expenses that would run 2 to $3 million. We took about $1.8 million worth of merger expenses during the quarter, and we had OREO write-offs of $2.4 million, all but $150,000 of that was Florida again. We had trucks write-off with $3.860 million. If you remember in the second quarter we wrote off about $2 million on trucks. I told you then that I thought about writing it all off but I think it may recover in part or in whole within the next period of time, but as we have seen more defaults and more problems with that we decide to write it completely off so there is no more and you won't see anymore write-offs on it. It may recover partially in 48 to 60 months but it's gone from our books, actually I think they are on the books at a dollar. Last item was a pre-tax gain of $448,000 resulting from our ownership and Arkansas Bankers Bank stock.

That's pretty well the components of what made the quarter. The strength of our balance sheet afforded us the ability to take this head on. Rather than on a piecemeal fashion, over several quarters, we built strong capital reserves for tough economic times such as these, and we dealt with our problems head on. Without the noise for the fourth quarter, the actual core earnings would have been $6.8 million or $0.34 a share. That would have been a tick above expectations and we talked about these items that made up the fourth quarter loss, so as we go to the operating highlights, I'm going to deal with just the core earnings basis so it's not confusing so these financial highlights will be on a core basis. Net income was $6.8 million versus $5.4 million last year, up $1.4 million and fourth quarter of '07 we earned $0.28 versus fourth quarter of '08, $0.34 would have, up $0.06 a share, pretty nice increase. I think the Street was looking for $0.31 or $0.32.

Cash earnings core up likewise $1.4 million to $7.1 million and core diluted EPS would be up $0.05 to $0.35. Link quarter 9-30-08 was $6.6 million and 12-31-08 was $6.8 million so we're up $253,000 for the quarter on net income on a core basis. Diluted EPS likewise third quarter of '08 up, it was $0.32 and the fourth quarter of '08 would have been $0.34, up $0.02. I said $0.34 up $0.02. Cash earnings core $7.1 million, that's up $253,000 likewise and cash diluted EPS at core would be up a $0.01. Net interest income year-over-year was up $3.8 million to $21.6 million and non-interest income was up $912,000 year-over-year to $7.6 million from $6.7 million. Non-interest expense was up $2.7 million to $18.3 million and that's primarily a result of the Centennial acquisition, and net interest margin increased lastly from 3.61% to 3.78% up 17 basis points.

On a link quarter basis, net interest income was off about $230,000 from $21.9 million to $21.6 million, and non-interest income core was down from $7.8 million to $7.6 million, about $200,000 while non- interest expense continued to drop from $18.5 million to $18.3 million, down about $200,000. Margin, net interest margin on a link quarter basis was dropped only four basis points from 3.82% to 3.78% in spite of the fact we had 125 basis points dropped in the fourth quarter. Return on assets on the core basis, last year this time was 0.94 and this year would be 1.04 like cash ROA, 1.01 last year and improved to 1.10 this year. Cash stands on ROE for the fourth quarter was 12.04, last year this time 10.98 and efficiency ratio last year at 60.54 and this year down to 59.8 to a drop of 72 basis points. On a link quarter basis, September of '08, we were 1% ROA core and 12-31,1.04. Cash ROA for the fourth quarter was 1.10 and third quarter 1.07, up three basis points. Cash terms on ROE fourth quarter of '08 12.04 and third quarter of '08 11.72 32 basis points. nice improvement and efficiency ratio ticked up a little bit from 59.25 in the third quarter to 59.82 in the fourth quarter and that was up 57 basis points, but still below our 60 goal.

Loans year-over-year grew $349 million, total assets up $288 million, total deposits $255 million, and stockholders equity grew $30 million to $283 million. Loans on a link quarter basis were actually down $11.7 million and Ron will add a little more color to that in a few minutes. Total deposits were down $65.2 million. We just didn't get involved in the game. We've got a major competitor who is a major regional competitor that is running the price of money up and we're just not involved in it. We're keeping our core customers competitive to the marketplace, and we're not chasing these silly rates up here. Matter of fact, Randy will talk more about it. We've had a good opportunity on federal home loan borrowings, and I think we've picked up some decent broker deposit funds that were cheaper than what these rates are.

Stockholders equity dropped $8 million as a result of loss and loan to deposit ratio kicked up 300 basis points. Allowance for loan loss reserves this time last year, we had 1.83% and September of '08 was 1.85% and December of '08 we raised that as we made loan loss provisions to 2.06% which is a record for us. It's the highest loan loss provision we've ever had. Allowance to non-performing loans coverage dropped from September of '08 to third quarter 226% to 135% at December 31 and non-performing loans increased from 0.82% at September 08 to 1.53% at December 31. Non-performing assets to assets likewise increased from 1.11% in the September quarter to 1.42% on the December quarter.

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

Thank you, Johnny. As John indicated, we saw a decrease in total loans outstanding of $11.7 million at quarter end; however it should be noted that we charged off $15 million in credit in Q4 '08 making it basically a breakeven quarter on volume. I'll comment in a moment on some bright spots on the horizon that should help the volume in the future. Let me turn to mix. Due to the seasonal decrease in agri credit as expected there's a very slight change in our mix. Real Estate loans went up about 80 basis points, C & I remained flat at 13%, Agri went down the same 80 BP that Real Estate went up.

Just a second on asset quality. Our pre-announced year-end results certainly focused on the asset quality issues that John has already touched on, lead by an increase in non-performers, charge-offs, additional provisioning and OREO writedowns, management took an aggressive look at the loan portfolio and adjusted accordingly. This deep look resulted in not only charging off $15 million against non-performing loans, 91% of which is in Florida, but it also included establishing specific new reserves of $10 million on about $34 million of performing loans. We believe that by recognizing these losses and reserves now , it allows Management to work through these anemic credits at more reasonable market prices. This allows us the opportunity to hold some very good properties, particularly in Florida, until the market turns around. As this economic storm blows through, we expect the skies to clear and return to more normal times, and we are now well positioned.

Let me move away from the unhappy stuff and talk about some happy things that's on the horizon for Home BancShares, and this is my Chamber of Commerce speech, if you will. I mentioned earlier that Home continues to be blessed with an in migration of stellar companies in various markets. Central Arkansas has attracted several base sector employers over the last couple of years. Most recently, last week, Caterpillar announced a $140 million plant to be located in North Little Rock, Arkansas. This plant will employ 600 workers. It will assemble motor graders for the construction industry and ship them worldwide. This should be open in '09. Southwestern Energy announced the construction of a $24 million regional headquarters in Conway, to house administrative functions in support of their Fayetteville Shale operations. This facility will not only accommodate the existing 220 employees with the goal of employing 400 to 450 employees at this location just blocks north of Home's headquarters. We have previously announced Hewlett Packard constructing a call center in Conway with a goal of 1200 jobs. As our friend David Smith at the Arkansas Democratic Gazette Newspaper wrote on Tuesday, January 6, "Overall about 170 companies including major operations of L& M Glass Fiber, Hewlett Packard, Well's Fund, Man Industries, Nordex and Southwestern Energy have announced plans in the past two years that result in the creation of about 19,000 jobs and an investment of more than $2.7 billion in Central Arkansas".

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

Sure. As Johnny mentioned, our net interest margin declined four basis points from the quarter from 3.82% to 3.78%; however the interest associated with the loans placed on non-accrual during the quarter accounted for about nine basis points of decline, which means our margin would have actually increased slightly for the quarter. The yield on interest earning assets dropped 24 basis points from 6.22% to 5.98%, with a majority of the decline attributable to loans for the yield decline 30 basis points. Yield on interest bearing liabilities also declined 24 basis points from 2.75% to 2.51%, of which the largest component was associated with interest bearing deposits and repurchase agreements. The non-accrual interest, combined with the Fed rate cuts of 50 basis points at the end of October and another 75 in December continue to put pressure on loan yields; however, our banks were able to offset much of the pain by reducing the yield on interest bearing deposits by 28 basis points, and the yield on repurchase agreements, many of which are indexed by 76 basis points.

I do need to note that many of our deposit rates have bottomed out so to speak, and any additional rate cuts would be expected to compress the margin in 2009. I'd also like to mention that during the year, 2008, we have been able to obtain FHLB advances with maturities greater than five years in the amount of approximately $50 million with an average rate of around 2.95%, and we hope that in the long run these will prove beneficial to the Company.

Kind of to wrap it up, we continue to work hard to maintain our margin and the fourth quarter was no exception. We are holding the line on loan rates and working on and decreasing deposit rates to the extent possible.

Thank you, Randy. Good report. Camille, I think we're ready for question and answers at this point in time.

Thank you. (Operator Instructions).

Camille, are we there? Did we lose you?

Okay, our first question, sir, will come from Tony Montemurro with Howe Barnes. Please go ahead.

I've been called a lot of things but that one is out there. No laughing, Johnny.

Hi, Tony!

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

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

This is Johnny. I think it depends when the press gets off of all of the bad news all the time. I think it scared some folks out there. Interestingly enough, we're having, with these rates down on the mortgage side, we're seeing lots of refinances and we're beginning to see new purchases come in, so that's certainly a plus, we think that could be a plus. It could stand up pretty strong for the year. They continue to keep rates down. I was visiting with our mortgage people the other day and said she had 20 mortgages to lock in at 4.5, so we're beginning to see, they're bottom fishing and we're beginning to see that happen. From the rest of the loan demand has actually been pretty soft here lately. Fourth quarter would have been up a tick if we hadn't had the charge-offs but it's really been a little soft. I think people are just running a little scared, Tony.

Thanks, guys.

Thank you.

Our next question will come from Jon Arfstrom from RBC Capital Markets.

Thanks. Good afternoon, guys.

Hi, Jon. How you doing?

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

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

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

Okay.

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

That would be on balance sheet, Johnny?

That would be on balance sheet, yes, sir.

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

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

You can understand why the mix would be different because we took such deep charges in Florida.

Yes. That makes sense.

We took deep charges there and as we had a not good quarter, we decided we went through every loan portfolio from A to Z, Arkansas, every bank in Arkansas as well as everything in Florida, and there wasn't as much left in Florida to specifically reserve for after we made the charges.

Okay.

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

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

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

Well they've been in the fours. Actually, they were up in the four and a halves, they pulled back to a little below four right now and it's not only is it reasonable. but it's reached and they've been bidding the price of money up and we've let some money go. We lost about $1.5 million last week at a four rate and as Randy said, we've been able to pick up some federal home loan borrowings. The last federal home loan borrowing we did, we borrowed $10 million at 2.01, so we're not going to go out and pay 4% for money when we have the opportunity to get money for less and we actually didn't need the cash, didn't need the $10 million , that last 10, but when you have an opportunity to borrow longer than five year money at 2% we thought we should take it.

Makes sense. Okay, thanks a lot.

Thanks, Jon.

Our next question will come from Matt Olney from Stephens, Inc. Please go ahead.

Hi, good afternoon, guys.

Hi, Matt.

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

It is some of the loans that we talked about in the conference call. It was some loans that we've been watching, and some of those are paying but we decided based on the real estate market in the state of Florida that we would charge them down as Ron said, so we get them down to a realistic price in the event we have to take them back, so some of those may heel up. Some of them may heal up but we just renegotiated one of them that was about a $4 million credit, started paying again. We didn't put it on performing. We left it on non-performing, but he is paying. There was one, our biggest project down there was about a $15 million project and had divided it into two locations, and we charged about $7 million on that project, so we're in position to sell it, we're in a position to force some recoveries, and the rest of it was we just went through everything. We just went through even down to some credits that we either charged at $10,000 or $20,000 or specifically reserved at 10, 15, $20,000. It was a pretty, it was pretty deep.

Okay. That's helpful, Johnny. And as far as the $34 million of loans that were identified, 44% I believe in Florida. As far as the loans within that bucket in Arkansas, can you give us an idea of a geography within Arkansas?

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

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

Matt? This is Ron. Let me put a little color on it I guess. These are predominantly Central Arkansas credits. We didn't lend out of area on these. They're residential related. Over 50% of the $9 million is residential, so these are subdivisions where they may have looked phenomenal two or three years ago, and too many lots might have come on the market and the borrowers might be struggling to make the payments, and through an abundance of caution we look at these credits, looked at the absorption levels and said if we had to sell them today, here is the price the lots would be. So we took those writedowns.

These are not charge-offs. We specifically reserved for these just in the event that the borrower can't pay. But they are right here. We didn't go out of area. They haven't gone out of area. They are right in the middle of this populus boom if you will where these 19,000 jobs are being recreated so we aren't worried about the absorption over the long run.

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

They are being completed. HP has gone into Little Rock in the Twin City Bank Tower formerly and they have had an aggressive training program getting their call center people trained so when this facility in Conway opens they will have their core people ready to go so HP has not pulled back at all. I understand the question you're asking, a lot of folks are saying because of the slowdown they are abandoning but no, sir. Southwest Energy is full speed ahead, so is H-P, obviously Caterpillar is, so we aren't seeing a pull back because of the current hiccup.

So how do you reconcile that looking at the slowdown in Q4 loan growth?

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

Okay. Thank you. That's all my questions.

Okay, Matt, we aren't seeing new projects come on stream. We're seeing projects, I don't believe I've seen a project that had been announced that is not, they aren't fulfilling that.

That's correct.

But we aren't seeing new ones fire up and I think it's primarily economic in the fear of what's going on out in the world that's slowed the new projects down.

There's a bit of a lag effect, Matt and the way I sleep at night is these lots that we have, when these 1200 people come on Board at H-P, or the 600 or the rest, when they come on, they will be looking for housing. So there is a bit of lag effect here. Okay, that's helpful. Thank you. Thanks.

Our next question will come from Brian Martin from Howe Barnes. Please go ahead.

Hi, guys.

Hi, Brian.

Ron, I wondered, could you give a little color, just the break down and maybe you gave part of this already but just the break out of the non-performing loans at quarter end, just by I guess by segment what's real estate, what's construction, sounds like you said there's not really anything on the C & I front so it's just all construction and commercial real estate. Is that kind of what you're saying there?

Ron, do you have it? Go ahead and give him the statistics.

Well, actually, I don't. Let me talk about Florida for a second on the ones that Brian, we went ahead and non-accrued and took the charges.

Okay.

As Johnny said there was one eight figure credit. We talked about it over and over again and we took a pretty substantial charge on that credit. There was another credit that also is residentially related that we took a six figure writedown on, and that's it. Everything else is below seven figures, so it's a number of credits, but most of them, the vast preponderance of them are residentially related. Now there might be a restaurant or there might be some other type of operator, or hotel or motel, but we're not seeing that big a problem in C & I, nor are we seeing that in Arkansas. The 44% that we talked about in Florida is still predominantly residential and it will be absorbed over some period of time.

Okay. How about just, you guys have a concentration, a small concentration of the hotel loans. Those are all performing at this point? No issues there?

Absolutely. We don't have a past due hotel loan in the system. They are all performing well. We had a guest house in Key West, Florida that we sold during the quarter. We lost about $250,000 on it but we sold it during the quarter.

Okay.

But hotel/motels are doing fine.

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

They are current and paying as agreed.

Okay.

No problems. We didn't set up a specific on those. They are doing fine.

Okay, and then lastly, the merger across, I know you took a piece of it this quarter. You're still expecting something to flow through in the first quarter; is that correct?

Yeah, Brian, this is Randy. We still do expect a lot of those expenses you can't take until we actually incur and we've got four more conversions coming so you'll see some of that in the first quarter, some in the second quarter.

Okay.

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

Right, and then lastly, Johnny you said in your remarks, maybe I just missed it, you talked about a new lender at Marine. I know the woman that went down there, we talked about that in the past but the new lender, was that something new or maybe I just didn't hear what you said properly.

Kevin Hester, who is Senior Lender for us for many years has taken over the Chief Lending position for Marine and spending his time between here and Marine presently. He has been a horse with us for many years.

Okay, so he was up in Arkansas and now he's kind of dual?

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

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

Someone asked us the question, is there anything that you didn't in hindsight, that you didn't reserve for in Florida either charge off or specific reserves at the end of the quarter and the answer to that is "No".

Okay. That's all I have then. Thanks guys.

Thank you.

Our next question comes from Joe Fenech from Sandler O'Neill. Please go ahead.

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

The loans we put on non accrual were predominantly Florida.

6.4 million of the increase was Florida loans.

Okay and the rest was Arkansas?

That's correct.

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

It's about 270.

It's a little higher than that, because with participation it's about 320.

So the answer to the size of the portfolio is 320.

Okay, and then a dollar amount of problem assets in Florida?

Overall the total is 16.5.

Okay, so 16.5 million in NPA's on a total balance of 320?

Well the 16.5 is non-accruals and they also have some 90 day plus which gets it to 17.3. And then you've got some OREO, I don't know if you have OREO in that total or not.

And that's 4.6 million.

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

Okay. So the 16.5 is the problem loans, the 4.6 is the OREO?

Is that correct?

That's correct.

Thanks, guys.

Yes, sir.

Thank you.

Camille?

Yes. Our next question comes from Steve Covington from Stieven Capital. Please go ahead.

Hi, Johnny, it's Joe Stieven. How are you?

Hi, Joe, welcome.

You had talked, I was going to ask you a question on sort of deposit pricing. You said you had a competitor and I know you aren't going to say the name but is this a big competitor, multi-regional or is this sort of just a 2 or $3 billion statewide, that's number one and number two is, are you starting to see more rational pricing on the deposit side from say the bankers in general? So that's really it. Just on deposit pricing. It is a large competitor that is causing the pricing problems, and they have dropped a little bit. That was the first part of the question. The second part of the question was?

The reasonable pricing returning.

Somewhat. Somewhat reasonable pricing returning on the deposit side. It's better. I mean, it's frustrating to these people as you can imagine we're in a 4% CD, Joe, and suddenly they are in a 2.25% CD so it is frustrating and not easy to lower those rates but we've been successful in lowering those rates. When you can borrow federal home loan money at 2% for five years you just don't want to step up too much.

Oh, I agree. I was just trying to understand a little bit more on the deposit side.

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

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

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

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

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

Okay, thank you, guys.

Thanks.

Our next question will come from Brian Hagler from Kennedy Capital. Please go ahead.

Good afternoon.

Hi, Brian.

Hi, Ron. You mentioned earlier in your economic update that there's going to be 19,000 jobs created. Did you mention a time frame on that or did I just miss it?

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

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

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

'09 and '10 primarily.

It should be together by 10.

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

I was only referring to the merger and acquisition expenses.

Oh, okay.

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

Okay, I appreciate the color. Thanks, guys.

Our next question will come from Jordan Hymowitz from Philadelphia Financial.

Hi, guys, thanks for taking my question. Couple things. First of all, the margin with the interest rate cuts that are just happened because I don't think there can be anymore technically. How much would happen anymore, expect to impact your margin next quarter?

Randy, do you want to comment, how much do we expect the first quarter margin to be impacted? Is that what you said Jordan?

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

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

Well let's assume you can. Just from the impact of the loan side.

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

31% you said?

Yes. Non-floored so to speak.

So that would be about 10 basis points then? Assuming you couldn't offset anything on the liability side.

Right. I think that calculates out about right.

Okay. Second question, can you give an update on Alltel in Arkansas?

On who?

Alltel.

Jordan? This is Ron. Verizon took over, closed on January 9. The only people that were severed on January 9 were the Top 5 people in the Company, Verizon has had a succession of buses taking them to a local hotel and welcoming them to Verizon. We expect there to be a pretty substantial call center left here in Arkansas. At one point, somebody had suggested as many as 3,000 people may lose their jobs. I don't know how many it's going to be. It will be quite a number, but one of the reasons I was highlighting the in migration of base sector employers is that reason. Whomever is there is coming in at a wonderful time, especially with HP up in Conway. It's almost identical to the skill set of the Alltel people.

Okay and final question. Is your charge-offs in Arkansas were extremely low. Can you quantify what parts they were? Would you say that, I mean you guys are not very exposed to Northwest Arkansas, but if you exclude Northwest Arkansas out of that picture, would the charge-offs be even lower or not really negligible?

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

Jordan, I'm looking at them right here and I don't, I mean, it's not even a million. It's not even $1 million, Jordan. So I think the answer to your question is charge-offs, 0 in fourth West Arkansas, about $1 million in Central Arkansas with the preponderance in Florida, with the balance in Florida.

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

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

Okay. Thanks, guys.

Thanks, Jordan.

Our next question will come from Charles Ernst from Sandler O'Neill. Please go ahead.

Good afternoon guys.

Hi, Charlie.

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

We're in the banking industry.

Right, but when you do, you must have heard people in the area talk about --

Well they said $5 gas, they said if it breaks below $5 it's not profitable for them and they aren't going to drill it.

Right.

We haven't seen any change from Southwest Energy. We saw Chesapeake do their pull back of some and they sold a piece to BP and with the committment to BP would drill them, so there is probably some slowdown. I would assume there's probably slowdown. We just hadn't seen it.

Okay, and then just to confirm, you said that you wrote it down to a dollar; is that right?

That's correct.

And were those, those were pools of trust preferreds, not individual trust preferreds to banks?

That's correct. The

And was there specific traunch that you guys owned in those pools?

Yeah. We were on the bottom part of that traunch. It was 14 traunches and we had traunch 14.

Okay, that doesn't work out too well all the time.

We bought it from Sandler.

Yeah, yeah. Well the other side of the house, I apologize.

What do you mean " We"?

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

20 million.

20?

Right. About 20 million.

It's very small. It has not changed.

Okay, and then the Florida exposure, I know earlier you said 320 million. Is that what's currently outstanding or is that commitments ?

That's currently outstanding. Book balances.

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

I don't have that but I can assure you it's --

Not a big difference?

It may be a million maybe.

both of the projects have been funded out and are fully complete. We're waiting sale or in some cases the customer has pulled back and chose not to fulfill the development.

Okay.

Very very little left to fund on those projects.

I don't think that we have, we may have some work in process there but it's virtually none. I mean it's small. Small percentage.

Okay, great. And then can you just quantify what your exposure is to hotels, hotel/motel?

I think we've got about $120 million.

Okay, great. Thanks a lot you guys. I appreciate it.

Okay, thanks.

Our next question will come from Matt Olney from Stephens. Please go ahead.

Hi, just a follow-up question for Randy as far as the margin. Randy, as you look at the margin month by month and second part, do you have a number, additional federal home loan bank capacity you can take on before you hit your limits?

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

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

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

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

Yes.

Now is that because there was some kind of reversal with the non-accruals or is that just purely interest rate?

A lot of it is because of the non-accrual interest that hit, yes. It's kind of difficult to segregate it all out with the non- accrual piece and also with the rate decrease.

A lot of it is because of the non-accrual interest that hit, yes. It's kind of difficult to segregate it all out with the non- accrual piece and also with the rate decrease.

The accrual piece, Matt was about nine basis points.

So when you back out from non-accruals you back it out for one month oral three months?

When you're talking about the nine, that's for the quarter.

Okay.

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

Okay, thank you, guys.

Yeah, when you do December it's going to be a lot more because you're just annualizing the one month hit.

Okay.

Okay?

This does conclude today's question and answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.

Thank you. It was a pretty tough quarter for the Company. As I said in the press release, it's abnormal for us to lose money other than the first year of business that this Company started, it's the first loss that we've had in some time. We ended up profitable for the year. We're not real proud of it, but it was what it was and we dealt with it, and people say is there any more, and I guess there's always some more out there but I can assure you that we took a deep, hard look at this, at our loan portfolio, and hopefully we'll have, we might have some more charge-offs in the future, but hopefully we'll have some recoveries to offset those. We chartered a course 10 years go using a conservative game plan and in this financial crisis obviously it was a correct course. We appreciate your support and we'll talk to you in 90 days. Thank you.

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