Bank Ozk (OZK) 2003 Q2 法說會逐字稿

Good morning. My name is Kerry and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Bank of the Ozarks conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to answer a question during this time, simply press star and one the them 1 on your telephone key pad. If you would like to withdraw your question, press the pound key.

At this time, I would like to turn the call over to Mr. Randy Oates, Senior Vice President for Investor Relations.

Good morning, I'm Randy Oates, Senior Vice President for Investor Relations at Bank of the Ozarks. The purpose of this call is to discuss the company second quarter earnings press release issued after the close of business yesterday. Our goal is to make this call as useful as possible in understanding the future plans, prospects and expectations of Bank of the Ozarks.

To that end, we will make certain forward-looking statement about our plans and expectations of future events, including statements about economic and competitive conditions, our goals and expectations for net income, earnings per share, net interest margin, net income income, noninterest incomes including service charge income, mortgage lending income and trust income, noninterest expense, our efficiency ratio, asset quality, interest rate sensitivity, future growth and expansion and loan and deposit growth. You should understand that our actual results may differ materially from those projected in any forward-looking statements. Due to a number of risk and uncertainties, some of which we will point out during the course of this call, for a list of certain risk associated with our business, you should also refer to the forward-looking information caption of management's discussion and analysis section of our public reports filed with the SEC. Forward-looking statement made by the company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The company disclaims any obligation to update or revise a forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

Now, let me turn the call over to George Gleason our Chairman and Chief Executive Officer.

Thank you for joining our call today. We're very pleased to be reporting excellent results including our tenth consecutive quarter of record net income and earnings per share. We've now posted record net income in 24 of last 26 quarters. The second quarter was a very busy and productive three month for our company. We had a lot of work to accomplish. And I'm extremely proud of our team's performance. As you probably saw in the press release, our earnings measures were very good. Second quarter net income was $4,837,000 , that's up 40.9% over last year's second quarter net income. Diluted earnings per share were 60 cents, that's a 36.4% improvement from the second quarter of last year and a 4 cent per share improvement from this year's first quarter. We are very pleased with our 1.96% return on average assets and 23.89% return on average equity for the quarter.

During the quarter, we opened four denovo banking offices, including our third office in Conway, our second office in Bryant, our seventh Little Rock office and our first office in Cabot. This was the first time we've added four new banking offices in a single quarter. Our team did a great job in coordinating these openings ,just as we expected they would.

On June 13, we closed our purchase of RVB Bank Shares Inc. and it's River Valley bank subsidiary in Russellville. Russellville is the largest city in Polk county which is the 11th largest banking market in Arkansas. This transaction added a fifth new office for the quarter as well as $41 million in loans and $50 million in deposits. Two weeks later, we converted their computer systems completing before quarter end the process of fully integrating RVB and its customer with Bank of the Ozarks products and systems. The closing and conversion went well. Extensive planning and training paved the way for our smooth transition for both customers and staff.

Mark Ross, our President and Chief Operator Officer and his team deserve tremendous credit for the job they did with the integration. We're very excited to be in this important new market and to have joined forces with the many fine RVB employees who are continuing with us. At the time of closing, we consolidated our existing Russellville loan production office and staff with the RVB office and staff, our senior officer in that market is now providing leadership for the combined team.

In the second quarter, we also opened a loan production office in Mountain Home, a market we had expected to enter in either 2004 or 2005. We accelerated our timetable after we had an opportunity to hire several experienced loan personnel in that market. Mountain Home is the largest city in Baxter County, which is the 12th largest banking market in Arkansas. We now expect to expand to a full-service office in Mountain Home in 2004.

For almost nine years now we have been pursuing our growth in denovo banking strategy. This strategy has taken us from five offices in 1994 to today's 38 offices, while also allowing us to achieve excellent returns for our shareholders. The success of this business strategy and the excellent job our team has done implementing it were evident in our second quarter results. I personally found two measures of performance to be particularly satisfying.

The first performance measure deals with growth. Even excluding the loans and deposits acquired as part of our RVB transaction, over the past four quarters, our loans have grown $137 million, or 21.2%. And our deposits have grown $190 million or 26.9%. This strong growth over the past 12 months was highlighted by the second quarter's record loan growth of $53 million.

The second performance measure deals with earnings. Even with the cost of opening four new branches and a new loan production office, the expenses of the RVB conversion, and the cost of expensing stock options for the first time, we achieved record net income and earnings per share, achieving a 4 cent improvement in diluted earning per share compared to the preceding quarter. Our business strategy has produced excellent results and I think it will serve us well in the future.

Let me discuss a few other matters. First, asset quality. At June 30 our ratio of nonperformance loans to total loans was 53 basis points. And our ratio of nonperforming assets to total assets was 42 basis points. Although these ratios are favorable, they are not as good as we've been reporting in recent quarters. Two factors at work here. The first is the normal ebb and flow the loans going through our process of collection. As you have seen, these ratios bounce around a bit from quarter to quarter. The second factor is the RVB acquisition. We added some good lenders and some good loans in the RVB deal. But RVB's underwriting and credit administration processes were not on par with ours. While we do not expect deterioration in RVB's asset quality ratios, it will probably take us several quarters to bring their portfolios, ratios of nonperforming loans and assets into conformity with our historical ratios. Even with that, our asset quality continues to be very good. And at this point, we do not see an adverse trends developing across our portfolio which would materially affect asset quality.

Our ratio of loans past due 30 days or more including past due nonaccrual loans, as of percent of total loans was 76 basis points at June 30. That's an excellent ratio and in line with our historical results notwithstanding the higher past due percentage contributed by the RVB portfolio. Our annualized net chargeoff ratio for the second quarter was just 16 basis points of average loans. This was much less than our first quarter annualized net chargeoff ratio of 32 basis points. As you can see, from these numbers, thee numbers do bounce around from quarter to quarter, but combined the first two quarters annualized net chargeoff ratio was 22 basis points. That's right in line with our net chargeoff of 22 basis points for the full year of 2002. And our five-year average net chargeoff ratio of 28 basis points.

Over the last two years, we have seen some effects of the slowdown in economic activity, including an uptick in bankruptcy filings, layoff announcement and business closings. But today these factors have not had a material adverse affect on our equal ratios. While there continues to be considerable uncertainty regarding the economy, at this time we remain cautiously optimistic about our asset quality.

The Arkansas economy is certainly not immune to the challenges facing our national economy. But there continue to be indications that our local economy is faring better than some. For example, the U.S. unemployment rate for May of 2003 was 5.8%. While our Arkansas unemployment rate was 5.5%. More significantly in the 15 Counties in which we operate in Arkansas, the weighed -- weighted average unemployment rate for May was 4.5% or 1.3 percentage points less than the national average.

We are pleased to report that our allowance for loan losses increased to $12.6 million or $1.52% of total loans as of June 30. This increase and our allowance for loan losses in recent quarters reflects our continued cautious outlook regarding the current uncertainty economic conditions as well as the change in the mix and the size of our loan portfolio. At the end of the second quarter, our allowance for loan losses was 285% of total nonperforming loans. We feel very good about the strong coverage ratio. We will continue to maintain a strong focus on credit underwriting and problem asset resolution in the quarters to come.

Next let me discuss our net income and net interest margin. We're pleased to report record net interest income of $12,284,000 for the second quarter. That's a 19.5% increase from the second quarter of 2002. In fact, this was our ninth consecutive quarter of record net interest income. This was achieved despite a decline in our net interest margin to 4.70% which is down 27 basis points from the high point in last year's second quarter and down 11 basis points from the first quarter of this year. Strong growth in our loans and other earnings assets has allowed us to post solid improvements in net interest income despite some margin pressure.

Of course maintaining net interest margin in today's environment is difficult because of the extraordinary low level of interest rates, the considerable volatility of loan and securities prepayments and the effects of a flattening yield curve. We have seen a high level of mortgage refinancing activity in recent quarters and this has resulted in a high level of repayments on the CMOs which comprise a large portion of our securities portfolio. This high level of repayments may continue for several more months, resulting in continued reinvestment of these funds at lower rates. While we feel we are well positioned for either a rising rate or a slightly falling rate scenario, there is no doubt this very low rate environment, high levels of loan and security replacement and further flattening of the yield curb could all put further pressure on our net interest margin.

As many of you are aware, the financial accounting standards board, FASB, issued statement number 150, which will be effective for us as of July 1, 2003. This statement deals with certain financial instruments which have the characteristics of both debt and equity such as the trust preferred securities which we have outstanding. We have previously reported these securities between liabilities and equity on our balance sheet, basically mezzanine level reporting. And have reported the payment of dividends thereon as distribution on trust preferred securities in the same manner as the distribution to minority interest. While this accounting has been completely in accordance with generally accepted accounting principles, effective for the third quarter, FAS 150 will require different accounting. Hereafter, the outstanding securities will be reported as debt.

And the payment of dividends thereon will be reported as interest expense. This change will have absolutely no effect on our bottom line net income or diluted earnings per share. But it will reduce our net interest margin and increase our efficiency ratio slightly. If FAS 150 had been in effect for the second quarter, our net interest margin would have been 4.55% and our efficiency ratio would have been 46.8%. Again, our bottom line net income and diluted earnings per share would not have been and will not be affected at all. Restatement of prior period numbers is not permitted under FAS 150. So for the next four quarters, our comparative results for these two financial ratios will not be truly comparable.

Our prospects for strong loan growth are particularly encouraging to us in this environment. In the past several quarters, strong loan growth has handily offset the effects of moderate margin compression, allowing us to still post excellent earnings growth and record net interest income each quarter.

In our January conference call, I indicated we expected loan and deposit growth in the mid teens percentage-wise in the coming quarters. In our April conference call, I raised that guidance stating that we expect loan and deposit growth in the mid teens to high teens percentage-wise. Our loan and deposit growths in the first six months of this year met or exceeded those expectations, even excluding the loans and deposits required in the RVB transaction.

Our loan pipeline for the third quarter looks very good. Based on the growth and our number of offices, growth and our lending staff, and the success we are achieving in gaining market share and new customers, we are once again increasing our expectations for loan and deposit growth in the coming quarters. Over the next few quarters, we expect loan and deposit growth to average from the high teens to the mid 20s per annum in percentage terms. Of course these numbers will bounce around from quarter to quarter, but this is our current best estimate of a good average.

Let me update you on our denovo branching plans for the remainder of 2003 and 2004. In our January conference call we reported that based on our strong financial performance last year and our positive outlook for 2003, we expected to open six to eight new banking offices this year. That includes the four offices which we opened in this past quarter. We believe these new offices are important elements in achieves strong balance sheet growth and income growth in future years. In January we also stated our belief that our 2003 results would be sufficient to absorb the expense of opening these new offices while still achieving favorable results for shareholders. I'm pleased to report that we still expect to open six to eight new banking offices this year and still expect that we can do this without sacrificing short-term performance goals.

Our current expectations are that we will open one or two new offices in the third quarter and one or two in the fourth quarter. Although we've not yet finalized our growth and expansion plans for 2004, at this point we expect to open roughly the same number of banking offices in 2004 as in 2003. As I've said many times, our growth and denovo banking strategy necessarily entails hiring new people, opening new offices and incurring all of the expense growth that goes along with that process.

As a result, our overhead or noninterst expense grows in most quarters. In the quarter just ended our expense increased 28% compared to the second quarter of last year. Our goal in this regard is simple. To spend or invest those dollars in such a way we expect to get at least $2 of revenue for every dollar of noninterest expense. This focus on revenue generation has served us well, as evidenced by the fact that we set new records for net interest income, deposit account service charge income, mortgage income and trust income in the quarter just ended. As a result our efficiency ratio for the second quarter was a very favorable 45.7% and this was our eighth consecutive quarter with an efficiency ratio below 50%.

We expect our noninterest expense will continue to grow in the coming quarters as we add new lenders and other staff members, open new offices and otherwise expand our business. Our goal is to maintain our rate of expense growth below our rate of revenue growth, thereby improving our efficiency ratio over the long term. Since we already have an outstanding efficiency ratio, this is a big goal. We believe it is an important goal. In our view, the banks that will be successful in the future are most likely those that can combine a high level of customer service with a very favorable efficiency ratio.

As I mentioned earlier, in the second quarter we recognized expenses as a result of our decision this year to start expensing stock options on a prospective basis. We believe this decision is a positive step for our stockholders and will better reflect the economic costs of stock options and in financial statements. Typically we grant director stock options in April, which immediately vest. And we grant employee stock options in September, which normally vest over three years. Including the expense already incurred in the second quarter, we estimate that this new policy will reduce our diluted earnings per share approximately 1 cent per share for the full year of 2003, approximately 2 cents per share for the full year of 2004, and approximately 3 cents per share in 2005 and future years. This estimate assumes that future grants are consistent in number and value with those granted in our most recent annual grants to directors and employees.

Before we entertain questions, a few words about our mortgage operations are also in order. Of course second quarter mortgage income was by far a record compared to any previous quarter. Certainly this reflects the favorable market conditions. But it also reflects, I believe, our continued interest in this category of business. As I've said repeatedly for a number of quarter now, we have a strong competency in the mortgage business and we are working to increase our market share. We have continued to do this by expanding our core of originaters in existing markets and by expanding into new markets such as the loan production office we opened earlier this year in Frisco, Texas to serve the suburban markets in the north Dallas area. In addition we've added mortgage staff in our new markets, Russellville this year and Conway last year.

We are pleased to report that our mortgage operations in all three of these newer markets were profitable in the second quarter, including our Texas mortgage office and our Russellville mortgage operation, both of which were in their first full quarter of operation. Of course, mortgage income is difficult to predict being highly sensitive to movements in interest rates and housing market activity. But our goal is to continue to expand our origination capabilities and market share in this category of business. With that said, our mortgage pipeline for July looks very good.

We are very pleased with the early success of our Frisco, Texas loan production office. In recent weeks we have identified another strong lender which we've added to our team. This lender is an Arkansas native with substantial experience in the Dallas area real estate and lending business. His focus on commercial real estate transaction. As a result of success of our Frisco, Texas, loan production office and our ability to hire additional quality lenders, we now expect to open a second loan production office in the Dallas area within the next few weeks. This second office will focus primarily on commercial mortgage loans but may also make residential mortgage construction and development loans.

In conclusion, let me restate that our goal is to continue to improve net income each quarter. This, of course, means reporting record income each quarter compared to the preceding quarter. We have achieved this goal in 24 of the past 26 quarters. The 60 cents of diluted earnings per share achieved in the second quarter certainly sets a new and higher target for us. Of course, this level of performance makes it more difficult to achieve our goal of increasing earnings in the remaining quarters of this year. But despite this higher bar, we still believe this is a reasonable and achievable goal for 2003, assuming that economic interest rate and competitive conditions remain fairly stable. We're excited about the opportunity to pursue this goal in the coming quarters and we look forward to the challenge.

At this time, we will entertain questions. Let me ask Kerry, our operator, to once again remind our listeners how to queue in for questions.

At this time, in order to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A Roster. Your first question comes from John Willis with Steifel Nicholas.

Great quarter.

Thank you. Good morning.

George, I was just wondering, your increase in guidance for loan and deposit growth, what are you seeing that causes you to increase those estimates?

John, it is a combination of a number of factors. We are enjoying very, very strong growth momentum. And I think a high profile in the markets we serve and a growing reputation in the markets we serve. We've also been adding additional lenders. Earlier this year we added an additional commercial lender to our Fort Smith team, we added an additional commercial lender to our Little Rock team. We've continued to add mortgage originators through the system.

We've got a new lending team on the ground in Russellville with that acquisition, we've got four new offices, a new LPO with three pretty good local lending people there in Mountain Home. We've got the growth that we would expect to continue to come from our Texas LPO as it continues to grow. We've introduced new consumer lending programs in the first quarter here in the central division where we've really focused primarily on mortgage and commercial lending in the past and basically just did the consumer lending that sort of walked in our offices and had to be done. We've initiated some proactive programs there and are achieving some decent growth there, something on the order probably of a half million to $1 million a month growth there. It is just a combination of facts. I think it is just the natural evolution and continuation of the growth from our growth and denovo branching strategy.

Okay. One other request regarding asset quality. Can you quantify how much RVB added to nonperforming assets? Because, I guess, midquarter they were up about $2.5 million?

I can't give you the numbers. I don't have that at my fingertips here. I can give you the ratios. Our nonperforming loans as a percent of total loans had we excluded RVB would have been 45 basis points. And our nonperforming assets as a percent of total assets, excluding RVB, would have been 36 basis points. As I say, the increase in those ratios reflects two things. One is the normal ebb and flow of our collection activities. Our first quarter numbers were of course very low. Our numbers would have bounced up notwithstanding RVB, but RVB pushed those numbers quite a bit higher, 6 and 8 basis points higher than they would have otherwise been.

We've been through the RVB portfolio significantly. We knew when we underwrote, engaged in the transaction, that they did not have the same commitment and focus on asset quality that we did. We went through their portfolio very thoroughly in due diligence and then after we signed the definitive agreement basically have had a senior lender in their office continuously since then. And he has completely redone all of that due diligence and went even deeper than we did in due diligence. Our due diligence indicated what was there. We didn't find anything else.

We've been working for several months to begin to instill in the lending team there, which is really a good lending team, they just needed a little more focus on this area. Instill in them our values and our principles for maintaining nonperforming assets, nonperforming loans at a minimum, quickly resolving problems when they arise and I think we will see their numbers come down.

The bounce in our numbers, excluding RVB, I've not seen anything there that would lead me to believe that that is an emerging trend. I think it is just the normal ebb and flow of the portfolio.

That is evidenced by our past due ratio. I think it was 76 basis points at the end of the quarter, which is still very low. I don't have the exact numbers on the RVB portfolio. But their past due percentage was between 2 and 3% at the end of the quarter.

We would have probably been at near record, if not at record past due percentage levels excluding RVB and our chargeoff ratio of 16 basis points in the quarter and 23 basis points for the first six months of the year indicate very stable asset quality. So we're not seeing anything there that I believe is a sign of a material adverse emerging trend. I think it is just the normal ebb and flow of the collection process.

And if I can, just one more question regarding the margin. Obviously we've got the fed rate cut right at the end of the quarter. Can you give a little bit more detail on what you expect from the margin going forward with the 25 basis point cut? Do you think you guys can absorb it? I guess excluding the impact of the trust preferred accounting change.

Excluding the impact of the trust preferred accounting change, let me tell you, John, I think our ability to absorb that 25 basis points is fine. As we've indicated in our last 10Q and our last several conference calls, when we discussed our simulation model results which are predicated on a parallel shift in interest rate, we think on those scenarios we are almost totally neutral. If the yield curve moves parallel up and down, a quarter or a half, or up a point or so, that has very minimal impact on our margins. So the quarter point fed cut, even though prime rate followed that, we were pretty much able to offset that in our deposit cost. What has caused the margin compression is not the decline in rates in a parallel sense, but the flattening of the yield curve which has caused an acceleration on prepayment on CMOs and the loan portfolio. I think that is going to continue through this quarter at least. I think we've see a bit more more begin compression probably in the quarter to come.

I don't think it is going to get any more severe than we saw in the last quarter. Hopefully it will be a little less severe, although it is a very complicated process to predict that. Everybody is struggling to try to predict that because there is considerable uncertainty at the rate levels. We don't see that as being real serious problem, although it certainly is an issue we and everybody else, I think, is struggling to deal with. The plus for us is that we're having very, very good loan growth unlike some other folks that are not able to get good loan growth in this environment. And that is letting us pose some very nice growth in our net interest income.

Okay. Thanks, George. Great quarter.

Thank you, John. I appreciate the questions.

Your next questions comes from Kevin Reynolds with Morgan Keegan.

Good morning, George.

Good morning, Kevin.

Looking at the numbers, and, to be frank, I'm astonished at the amount of loan growth you're able to put up in this sort of environment. I wonder if you can reconcile that against the backdrop of the economy today and talk about the mix of the portfolio in terms of fixed versus floating and how the possibility of increased competition from people outside the sort of central Arkansas area might impact your outlook going forward.

Okay. Let me comment on the fixed versus floating issue first. And -- since that's a hard number -- I actually have that number here. At the end of the quarter, 26.2% of our loan portfolio was variable rate. And you'll note that is, again, an increase of a percentage point, maybe even a couple of percentage points from the last quarter. We are trying to increase that variable component of our loan portfolio at least 1% point per quarter and are meeting good success with that. The nice thing about that 26.2% floating is that 43.75 percent of those floating rate loans, almost half of them are at a floor rate. We started putting floors in a lot of these variable rate loans about a year ago.

And that is helping us to mitigate some of the effects of these last couple of rate reductions. So 26.2% is variable. We hope to increase that another percentage or two in this quarter. And about half, almost half of them, not quite half of them are floored out at the present time, which will help us if the fed does cut one more time.

The other part of your question pertaining to growth, let me address that. Obviously our markets are not growing at the rate that our loan portfolio is growing. And that's been true for all nine years that we've been pursuing this growth and denovo branching strategy. Our growth rates have consistently and substantially exceeded the market growth rates. So we are taking a lot of business away from our larger competitors and even our smaller competitors. As I've mentioned in the last couple of conference calls, one of the very favorable things about our growth story, as much as we're taking market share away from the Bank America regions, U.S. Bank Corps we compete with, Bank Corp South, the out of state guys, we are taking a large market of loan share away from smaller competitors as well. We think that suggests that growth strategy has long legs to run way into the future. A very positive evolution of the strategy.

During the quarter, we picked up some exceptionally good large pieces of loan business from both the big banks and some smaller banks. And some of that business was to -- some of the wealthier families and wealthier companies in Arkansas, it was fairly cheaply priced business. But it is extremely high quality and certainly deserving of the pricing that we had to give to get that business.

So, again, as I've said in response to John's question, I think this growth is a continued evolution of our denovo branching strategy as we're gaining more momentum in the markets, a greater reputation in the market, and we're picking up a lot of new customers, some of those are some very large and some very wealthy customers that will be very, very good relationships for the bank.

As far as competition from outside, we have not seen an acceleration from competitive pressures from outside of our markets. As we've said many times, we're in very competitive markets, as it seems like everybody in the world is today. I've not seen a real acceleration or increase in competition from outside the market. I think that the financial institutions, just my personal read, is that financial institutions that are in our markets from out of the area, particularly from out of state, are probably losing market share more than gaining market share. Does that answer your question?

It gets me down the path. Let me ask about the fixed versus floating in a different way. Looking out at the quarters and recognizing the revenue stream as a function of volume times margin, with such a high percentage of fixed on the balance sheet and price competition quality credits, I'm curious if it maybe makes more sense to slow down the volume and protect the margin if we are, in fact, at a bottom in the rate cycle. Give me some thoughts on that.

Well, I would give a couple of thoughts on that. Most of the fixed rate loans that we do, reprice at 1, 2, 3, 4, 5-year intervals. We do very, very little that has a fixed rate beyond five years. If you factor in the rolloff on the fixed rate portfolio, the monthly payments and other factors, and the variable rate portfolio and the composition of our liability, Kevin, we do think that we are truly almost neutrally gapped. A the simulation model for the last quarter showed, which was in our 10Q, an up 200 basis point environment, we projected that our net interest income would decline 4/10ths of 1%, which is basically about 2 or 3 basis points probably. A couple of basis points, from the baseline scenario. It ended up 100 basis point scenario, it declined 1%, which is about 5 basis points, say, from the baseline scenario.

So we are working very hard to maintain a neutral interest rate risk position while still growing and gaining market share and building our franchise. You know, we could certainly, at any point in time, we could start pricing to achieve a richer margin and lose a lot of growth on both sides of the balance sheet. And we understand that. But we're trying to achieve an ideal ratio of profit margin and growth. And we think we're right where we need to be now.

Now, I know you mentioned the word deleveraging or shrinking the balance sheet. And I know there's been a lot of discussion in the last month or two. I've been reading some of the same articles you probably have in "American Banker" about companies deleveraging or selling off loans or selling off their mortgage portfolio and deleveraging.

Let me comment on that. We feel like we've got a very good balance sheet mix. Back in 2000, you and I have discussed this, we got -- because of the growth opportunities we had for deposits in '98, '99 and 2000, we got our mix of earning assets skewed a little too richly toward securities and away from loans. At year end 2000, securities accounted for 33% of our earning assets. That's not where we wanted to be. We worked all the way through 2001 to get that down. And we ended 2001 with securities accounting for 23.3% of our earning assets at year end.

Our goal since then has been to maintain that basically between 22.5 and 25%. And we finished the June quarter at securities accounting for 24.55% earning assets. We think that is an appropriate mix. Anywhere from that 22.5 to 25% of earning asset mix. Some of the folks in North Fork, for example, had a big article and made a big deal about they were going to settle hundreds of millions of mortgage-backed securities and deleverage their balance sheet. Well, I looked at their numbers. And their securities were 46% of earning asset. If we were at 46%, we would be deleveraging our balance sheet as well. Basically with the 24 to 25%. 23 to 25% mix of securities as a percent of earning asset, that's where we want to keep the ratio.

We think that is an optimal mix. We didn't leverage up to try to take advantage of the rate environment. We didn't want to mess up the proper balance sheet mix we had worked our way back to. So we don't feel like we need to deleverage or change our balance sheet mix at this point in time.

Okay. Thank you very much. Good quarter.

Thank you, Kevin.

Your next question comes from Payton Green with FTM Midwest.

Good morning, George.

Hi.

A couple questions. One, how is the outlook for M and A from your perspective as a potential buyer? Are properties available or are they still a little too expensive? And also, second kind of unrelated questions, what kind of opportunity do you see based on the superior (inaudible) deal.

Let me take the Superior R Vest [ph] deal first. We think that is a positive. Obviously RVest has made it very clear that they wanted to grow their market share in [inaudible] Country area, the Sebastian County area and Boone County area, which are the three largest markets in which we operate. Their desire to grow their market share in those and other markets around the state and the fact that they have a foothold already in those three markets, I think is going to suggest that they were probably going to be a fairly aggressive and vigorous competitor for business in those three markets.

Obviously Superior has large chunks of market share in each of those markets. So I would suspect that RVest appetite and expectations for growing market share lot in those markets has changed from an offensive mode of trying to grow market share to more of a defensive mode now of trying to protect the consolidated market share that they have in the superior transaction. So we think that will make them a little bit more docile competitor in those markets, because you're less likely to go out and do something crazy on pricing if you're going to be pricing 15 to 20% of the market you already own than you are if you own 1 or 2%. We think it just assures that they are likely to be more rational in their competition, fulfills their expectation for growth and eliminates one competitor in the market.

There may be a little breakage or disruption from the merger and consolidation. Those seem -- that seems to be the normal case in most acquisitions, if there is, we hope we'll get a little piece of that. But on balance, we think it is a positive for us.

Your second -- or first point, the M and A opportunities, we think there still are opportunities to make acquisitions and that they will still be a considerable bit of consolidation in the Arkansas banking market. They are somewhere between 170 and 180 banks in Arkansas, smaller than we are, and I don't think all of those guys will be here five years from now or ten years from now. We will certainly look at acquisition opportunities that we think make sense, such as the Russellville opportunity. That's a great market. A franchise that has a small enough market share that still has tremendous growth opportunity in the market. We were able to buy it at a reasonable price that should be accretive from this point forward to our earnings.

So we'll look for those opportunities. And I think there will be some along the way. We're going to have to be patient and be disciplined as we have always been in putting the pencil to those things and doing our due diligence and make sure what we buy is going to make money our shareholders, for our shareholders, instead of just the shareholders of the acquired entity.

Okay. Great. Thank you very much.

Thank you, Payton.

Your next question comes from Chris Kelley with [inaudible] Capital.

Good morning, George, how row?

Good morning, Chris. How are you?

Doing just fine. This is a tiny point. I haven't heard you discuss this too much. Can you tell me a little bit of what is going on over at the loan production office in Charlotte. I know that was an employee that had to move back home and you let her open that up. Is that doing anything meaningful above/below expectations? Is that what takes you down to Dallas? Is it opportunity or just the demographics of Dallas that keep you interested down there?

Chris, the Charlotte operation is performing well. It is not blowing the doors off, by any means. But it is profitable. As I said I think a couple of times over the last year, it makes money except in the months when she generates a pretty good growth in her portfolio and we have to put up reserves for the new growth. So on an operating basis, we've had no loan losses over there, no past dues over there. No problem assets. And we're being careful to continue to grow the thing at a fairly deliberate and conservative sort of pace. I think it is a positive. If the operation wasn't there, you wouldn't notice it particularly in our numbers. But I think it will continue to become a little bit more valuable contributing piece as we go forward.

The Texas operation, we have much higher hopes for. And are much more interested in and think that it has the potential to be a much more significant part of our future. The mortgage guys, when they set up the first LPL there in Frisco , were very optimistic will that. They continue to be optimistic about it. And that optimism is certainly borne out. We opened the thing in early February. And they made a profit in the second quarter. The first full quarter of operations. And I think they are just really getting their legs under them and beginning to see their potential down there, much less realize their potential.

We have had the opportunity to hire another guy, as I mentioned, to lead a second loan production office down there, focused on commercial lending. This guy has absolutely fabulous credentials. Is a real knowledgeable person in the real estate business in that market, has been down there for a number of years. He's an Arkansas guy. We know him. His father is a well-known Arkansas real estate person and a customer of ours. We've known him for years. So we feel very good about this as the opportunity to add another dimension to that Texas office. And if the mortgage operation there and the commercial piece that we're installing go as well as we think they are, I would think you would see us gradually possibly commit more resources to that market.

Okay. Great. Thanks very much.

Thank you, Chris.

Your next question comes from Ariel Whitman with Sandler O'Neill.

Great quarter, George. Very impressive. I just wanted to ask a question that sort of follows on with Payton's, with respect to, are there other banks to be acquired and where should we expect future denovo branch expansions and or acquisitions.

Okay. Let me take the denovo expansion first. Obviously we've got seven offices in Little Rock. And our market share in Little Rock is probably about the same as US Bank Corps. And I think they are servicing the market with about 22 offices. And we've got about 11 in the county.

We probably are going to add over the next two or three years another half dozen offices in Little Rock, north of Little Rock and elsewhere in this county. That should get us pretty much all that we need in [inaudible] county. We have a pretty strong presence in Forth Smith. We're of course adding another office there, hopefully this quarter. And we will want to continue to expand in and around that market as we will in and around the central Arkansas market of Little Rock. Conway, we're continuing to expand that. Russellville, we'll continue to expand there.

So most of the expansion I think you're going to see over the next 18 months, apart from Mountain Home, which is a new market for us, will probably be either in or right adjacent to existing markets. Little Rock, North Little Rock, Fort Smith, Conway, Russellville. And by adjacent markets such as the Cabot market that really is a suburban market to Little Rock and possibly Sherwood and Jacksonville and Benton. which are also suburban Little Rock market.

Obviously there are a few other very significant markets in Arkansas we want to be in in the future such as Benton County and Washington County that are the number two and number three banking markets in the state. And probably Garland County that is also a top ten market banking county. In the coming years, you'll probably hear those names mentioned from us.

Acquisitions, again, we would focus in that northern, western and central part of Arkansas that you've seen many times on our map. We think that is a part of Arkansas with very favorable demographics, compared to markets east and south. So we're going to primarily focus on those markets.

I would not rule out a market -- an acquisition across the state line. I wouldn't rule out an acquisition in a particular selected market east or south. But predominantly, the vast majority of our focus is going to be northwest and central Arkansas.

Given the Texas loan office, would it be something feasible to think of a branch office opening to augment that?

Ariel, I think that is a real possibility.

Okay.

Somewhere down the road.

Okay.

It is a fabulous market. Tremendous growth market. And if our mortgage LPO and our commercial LPO do anywhere near as well as we think that they will, I think there is a real possibility that we might buy a small Texas charter, even a shell charter in Texas and try to expand into a full-service banking mode there. That decision has not been made. We're certainly evaluating carefully, how these LPOs work and getting to know that market much better through the LPOs. But that's certainly a possibility.

Okay. Thank you.

Thank you.

You have a follow-up question from Kevin Reynolds with Morgan Keegan.

George, a small question here. On your mortgage production for the quarter -- you may have mentioned it and I may have missed it. I apologize if I did. Refi versus purchase.

I did not mention it. Kevin, the refi number for the quarter -- I can give you the -- I can give it to you by month. I actually don't have it by quarter. The April refi volume was 75.6% of total production. May, it was 67.2%. And June, 67.8%. So just right in there, right at 70% refi.

Kevin, I would remind you that that percentage may be a little bit misleading. And we maintain a very significant development and construction lending operation. And loans that we make where we do the construction loan in the ultimate buyer's name and then refinances that construction loan into a permanent, that technically counts for mortgage purposes as a refinance, even though it really is a new original nation of a home loan. We just happened to do the financing also for the ultimate owner of that home. So that causes the refi percentages to be overstated quite a bit, because of the way those things are accounted for, for refi purposes.

Okay. And then do you have a total volume number for the quarter?

Kevin, I can give you a pretty close number. I don't have a specific number in front of me. But it is approximately $90 million of loans originated and resold on the secondary market. We were doing approximately $30 million a month. More or less.

Okay. And all servicing released.

Yes. And all servicing released. All sold on a nonrecourse base. Again, we take no market risk on them. We've got them sold when we commit to the customer for them.

Okay. Thank you.

Okay. Thank you. Kerry, do we have any further questions?

No, sir, you do not.

If we have no further questions. At this time, that concludes our call. Thank you again for participating in the call. And we look forward to talking to you in about 91 days, plus or minus. Thank you.

That concludes today's conference call. You may now disconnect.