Bank Ozk (OZK) 2003 Q3 法說會逐字稿

Good morning. My name is April, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Bank of the Ozarks third-quarter earnings release 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. [OPERATOR INSTRUCTIONS].

Thank you. I would now like to turn the call over to Randy Oates, Director of Marketing. Mr. Oates, you may begin.

Good morning. I'm Randy Oates, Director of Marketing for Bank of the Ozarks. The purpose of this call is to discuss the company's third-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 statements 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 interest income, non-interest income, including service charge income, mortgage-lending income, and trust income; non-interest expenses; our efficiency ratio; asset quality; interest rate sensitivity; future growth and expansion; opportunities for market-share growth; loan and deposit growth; and the possible prepayment of certain trust-preferred securities and the effects thereof.

You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call. For a list of certain risks 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 statements 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 any forward-looking statements 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, Randy, and thanks to our listeners for joining the call today. We're very pleased to be reporting excellent results once again, including our 11th consecutive quarter of record net income and earnings per share. We've now posted record net income in 25 of the last 27 quarters.

While we're focused on achieving our long-term goals and objectives of building franchise and shareholder value, we are also focused on continuing the streak of consecutive quarters of record net income and earnings per share. As reported in our press release, our third-quarter net income was $5.274 million, up 42.7 percent over last year's third-quarter net income. Diluted earnings per share were 64 cents -- that's a 36.2 percent improvement from the third quarter of last year, and up 4 cents per share from the previous quarter. We were very pleased to with out 1.68 percent return on average assets and our 23 percent plus return on average equity for the third quarter.

Today, I want to try to give you a good mixture of commentary on our third-quarter results and also our plans and expectations for the upcoming quarters.

Let me first talk about growth. We achieved good loan and deposit growth during the third quarter. Loans grew $34.3 million during the quarter, or 16.5 percent annualized, even though we had a $6.1 million reduction in our portfolio of mortgage loans available for sale during the quarter. Deposits grew $47.5 million during the quarter, which is an annualized growth rate of 19.9 percent. As reported in the press release, our loans grew 25.2 percent in the last 12 months, and our deposits grew 31.4 percent, excluding the loans and deposits acquired in RVB acquisition during this year's second quarter. Over the past 12 months, our loans have grown at a 19.2 percent rate, and our deposits have grown at 24.7 percent rate.

We've now been pursuing our growth and de novo branching stride strategy for almost nine years. We've achieved excellent loan and deposit growth with this strategy, and we believe that we have great potential for further growth. Accordingly, we expect that our loan and deposit growth in the coming quarters in percentage terms will range from the high teens to the mid-20s range on an annualized basis. That basically reflects a continuation of the type of growth that we have seen in the last quarter and over the last year.

With the opening of our third Fort Smith office during the third quarter, we now have 39 banking offices in 15 counties. 20 of those offices, just slightly more than half of the total, are less than five years old. 34 of the 39 offices are less than nine years old. In other words, we believe we have more potential than ever before for growth within our existing offices.

Our weighted average market share in the 15 counties which we currently serve is just about 6 percent. Our long-term goal is to increase our weighted average market share in those 15 counties to somewhere between 15 and 18 percent. The opportunity to achieve market-share gains in existing markets and the untapped capacity within our existing office network are key factors which make us optimistic that we can continue to deliver favorable loan-and-deposit growth percentages.

During the last week of the third quarter, we issued $28 million of trust-preferred securities in two separate transactions. Trust-preferred securities are counted as Tier One capital within certain limitations, with the balance being counted as Tier Two capital. Issuance of these trust-preferred securities gives us a considerable amount of flexibility in implementing our growth and expansion plans.

We realize that trust-preferred securities count as capital for regulatory purposes, but we also realize that they do not provide the same sort of permanent capital as common equity. Our desire is to operate with ratio of tangible common equity-to-assets in the range of 6 percent to 7.5 percent. As of September 30th, 2003, our ratio of tangible common equity-to-assets was 6.81 percent, well within that target range.

The recently issued Financial Accounting Standards Board Interpretation No. 46, known generally as FIN 46 (ph), may change the accounting treatment for the trust through which trust-preferred securities are issued. As a result of, there's a possibility the Federal Reserve might change the capital treatment of trust-preferred securities. While we can't predict the final resolution of this issue, we felt that it was prudent to issue these securities now in the expectation of the possibility of some sort of grandfathering provision. The trust-preferred securities that we just issued may be prepaid by the company at par on or after the fifth anniversary, or earlier in certain circumstances, including the change in tax treatment or a change in regulatory accounting treatment. We have no deferred origination costs related to these securities; therefore, if in a few months or a few years they're no longer afforded the current capital treatment, we can prepay them immediately without premium penalty or any write-down of deferred origination cost.

We expect that $17.3 million of the proceeds from these trust-preferred securities will probably be used to prepay our previous issue of 9 percent trust-preferred securities, which were prepayable on or after June 18th of next year. We anticipate making a final decision regarding such prepayment in May of 2004. In the interim, we have invested the proceeds in investment securities.

Based on current interest rates, prepayment of the 9 percent trust-preferred securities could generate substantial interest cost savings. If we prepay the old trust-preferred securities next June, we will have to write down $852,000 pretax, or approximately $517,000 after-tax, of unamortized issuance costs associated with those securities. Using the 4.07 percent initial rate on our new trust-preferred securities, it would take us 11.5 months of interest savings to recoup the right off of the debt issuance cost.

While we are discussing capital, let me also remind you that on September 16th, we announced our board's approval of a 2-for-1 stock split to be effected by issuing one additional share of common stock for each share of outstanding common stock. This stock split was authorized, subject to shareholder approval, of an amendment to our Articles of Incorporation, increasing our number of authorized shares. We expect a favorable vote on this matter at the special stockholders meeting to be held on December 9 of this year. Subject to that approval, the effective date of the stock split will be December 10th, with a record date of November 26. We believe this split will make our shares more affordable and accessible to individual stockholders, while increasing our overall shareholder base and market liquidity.

I think that about covers the loan, deposit, and capital issues I wanted to discuss. Let me now give some attention to the income statement. Once again we achieved record net interest income as our strong loan and deposit growth more than offset modest margin compression. Our net interest margin for the third quarter was 4.48 percent, down 22 basis points from the second quarter. As discussed in the press release, 14 basis points of this decline was the result of the implementation of SFAS No. 150. Excluding this impact, our margin compression for the quarter was 8 basis points. During the third quarter, we continued to have an elevated rate of prepayment in our loan and securities portfolios, which contributed to this margin of compression. We expect to these prepayments to slow in the fourth quarter. While we expect a small amount of additional margin compression in the fourth quarter, we are cautiously optimistic about the prospects for a more stable net interest margin in 2004.

As I have already stated, we expect loan and deposit growth in the upcoming quarters to average somewhere between the high teens and the mid-20s, percentage-wise. We believe that this will more than offset the effects of any additional margin compression, allowing us to achieve good growth in net interest income each quarter.

We were very pleased to report records for the quarter in all three of our primary categories of non-interest income -- deposit account service charges, mortgage income, and trust income. Service charges on deposit accounts exceeded $2 million for the first time. While we expect some volatility in this number from quarter to quarter, over time we expect this category of income to grow at roughly the same percentage as our deposits.

Mortgage lending income was extremely good for the third quarter -- another record -- as we continue to benefit from both the favorable housing market and the refinancing bank (ph). For the first nine months of this year, our mortgage lending income was up 168 percent compared to the first nine months of last year. The spectacular showing is a result of two factors. First, we've enjoyed, along with other participants in the mortgage business, an unprecedented wave of refinancing activity in a strong housing market in recent quarters. And secondly, we have expanded our mortgage operation into new markets, and worked hard to increase our market share in existing markets. Undoubtedly, mortgage-lending income will decline in the fourth quarter from the record level achieved in the quarter just ended. As the refi wave recedes from the recent high watermark, we expect our fourth quarter mortgage lending income to reflect a more normal level of business. This quarter may tell us a lot about just where our baseline mortgage income number is as a result of our expansion into new markets and our efforts to increase market share in existing markets.

Our trust income increased nicely in the third quarter. This is a result of continued growth in our number of trust customers, and is also a result of a high level of municipal bond financing in Arkansas in recent months. The low interest rate environment, combined with the financing needs of various governmental entities, have led to a high level of municipal bond issuance in Arkansas which has given a good boost to our corporate trustee business. We foresee a continuation of these opportunities in the current quarter, and we hope that we'll be able to continue to be successful in getting sizable pieces of new corporate trustee business and the resulting fee income.

Our non-interest expense was up substantially in the quarter just ended. A significant portion of this was directly related to our strong revenue performance. For example, our high volume of mortgage business and trust income resulted in increased levels of variable compensation expense, including commissions, incentives, and bonuses. The majority of our mortgage originators are now commissioned-based, and thus, as mortgage volume and income rose substantially over the past few quarters, so did compensation expense. We estimate that variable compensation expense in the mortgage division equaled approximately 33 percent of mortgage revenue for the quarter just ended. We also took advantage of the high level of third-quarter income to increase various discretionary expenditures, such as advertising and public-relations expenses. During the third quarter, we also incurred certain expenses in connection with the conversion to a new trust computer system, the opening of a new Dallas loan production office, and the opening of a third full-service office in Fort Smith. Even though we expect to open an additional banking office in the fourth quarter, we expect that our fourth quarter level of non-interest expenses will be below the third-quarter level of non-interest expenses.

Let me briefly comment on asset quality. We continue to feel very good about our asset quality. Although our ratios of nonperforming loans and nonperforming assets were above the comparable numbers for September of last year, both ratios improved from the levels reported as of June 30 of this year. Our annualized net charge-off ratio for the third-quarter was 24 basis points, which is the same as our annualized ratio for the first nine months of this year. And this ratio is very consistent with the 22 basis points of net charge-offs for the year 2002, and the 24 basis points of net charge-offs incurred in 2001. We believe this reflects stable asset quality over that period of time. In fact, our ratio of loans past due 30 days or more, including past-due non-accrual loans to total loans, was 0.64 percent -- just 64 basis points -- at September 30 2003. That is the lowest past-due ratio that we've reported at the end of any quarter since we went public in 1997. We increased our allowance for loan losses to $13.1 million during the quarter, which keeps the allowance at 1.52 percent of outstanding loans. At quarter end, our allowance for loan losses was a very healthy 302 percent of total nonperforming loans.

In conclusion, let me state, as I have stated many times before, that our goal is to continue to improve net income each quarter. This means reporting record income each quarter compared to the preceding quarter. We have achieved this goal in 25 of the past 27 quarters. The 64 cents of diluted earnings per share achieved in the third quarter certainly sets and new and higher target, and of course, this level of performance makes it more difficult to achieve our goal of increasing earnings in the upcoming quarter. But despite the higher bar, and despite the expected adjustment in mortgage-lending income to a more normal level, we still believe this is a reasonable goal for the coming quarter. Because of our expectations for lower fourth-quarter mortgage income, improvement in our fourth-quarter net income over third-quarter net income may be more modest than the improvements that we have achieved in recent quarters. We are excited about the opportunity to pursue this goal in the coming quarter, and we look forward to the challenge once again.

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

[OPERATOR INSTRUCTIONS]. Barry McCarver (ph).

Good morning, everyone, and congratulations on a great quarter. George, can you talk a little bit about your loan production offices -- specifically, the one in Charlotte, and also the one in Texas, and your expectations there?

The Charlotte office, Barry, we have had open a couple of years, and it has done a good job. It is bouncing around breakeven to slightly profitable. Basically, the way that is working -- in months where they don't grow their loan portfolio, they make a fairly modest but positive profit number; in months where they grow their loan portfolio, and we have to put another chunk in reserve to match up with their portfolio growth, they typically fall short of profitability. We feel like that office is probably going to do much better in the year to come. I had a planning meeting with the lady who runs that office for us. She is very positive and feels very good about our pipeline in the year to come. Of course, she's been a longtime employee with us who transferred to Charlotte, and has done a very good job for us over there. We have been, as I've said many times before, very conservative in that office because it is out of our normal footprint. But we're getting more comfortable with her ability to produce some good business over there, and she is pretty excited about her prospects for the coming year.

The Frisco, Texas office -- our first Texas office -- opened in February of this year. It's primarily a residential mortgage office that generates loans primarily for resale in the secondary markets. We lost money there in February and March. We made money in the second quarter of this year, which was the first full quarter that that office was operational. We made very good money in the third quarter of this year -- in fact, made enough money in the second and third quarter that we recouped all the startup losses and are now in positive territory for the year to date, and we continue to be very optimistic about that.

The third office -- the Dallas LPO (ph), which we indicated in our conference call 3 months ago that we would be opening early in the third quarter -- we have opened. It's a one-person office. We have an Arkansas native who's a lawyer and a CPA and has been heavily involved at a very high level in commercial real estate markets in Dallas for a number of years. We've not yet produced any business in that office, although we have approved our first loan a couple of weeks ago from that office, and have a number of other transactions we are looking at. We are cautiously optimistic on the ability of that office to contribute in the future. Again, we're little outside of our normal footprint there, so we're being a more conservative in the lending there as we were in Charlotte, just because we don't have quite the same familiarity with market area. But we do have good players who we have a lot of confidence in, and relationships with running all three of those offices, and we feel very confident about their ability to contribute in the coming year.

Joseph Stieven.

Good morning, George. A couple of things -- first of all, can you talk about how you're doing in the leasing business? I think you've hired someone recently to help that business -- that's number one. Number two, on the mortgage side, George, how much of your quarterly production in the third quarter was refi, and sort of -- if you guys look out -- in theory your production shouldn't drop like the entire industry because you guys are expanding your business. Just talk a little bit about that -- thanks, George.

Let me take those -- thank you Joe, let me take those backwards, and I will address the mortgage issue first.

During the quarter just ended, approximately 28 percent of our loan origination was purchase loans, and approximately 72 percent was refinance. That's pretty consistent with the numbers we have been running, plus or minus a couple of percentage points all year long. As I had commented in response to similar questions in previous conference calls, the refinance percentage is a little bit misleading because we have a very significant construction and development lending program within the bank. And loans that our construction loans that are done in bank for the customer who is the ultimate purchaser -- basically set up in the name of the buyer -- that refinance out of the construction loan to the secondary market are counted in that refi total. I can't really quantify, but it is not an insignificant portion of that. So, probably somewhere -- if you factor that in, roughly a third or so -- plus or minus is purchase, and two-thirds is refi activity.

We have significantly increased our mortgage production capabilities in the last year. The Frisco office, as I mentioned in response to Barry's question, opened in February, and that office is a strong contributor. Our Russellville, Arkansas mortgage operation opened shortly before we bought the RVB Bancshares back there in Russellville, and we picked up another strong originator in that acquisition. So we have a couple of strong originators in that market who've done a wonderful job for us in the last four months. Our Conway mortgage operation has grown, as well as the addition of additional originators in the central Arkansas area. So, while we're not anxious for the refi boom to be over -- we've certainly enjoyed the heck out of that -- we are a little anxious to see where the natural level of our mortgage business is, the normal level is, with the expanded capabilities. And (technical difficulty) really hard, it's impossible for us to break that down and know that number.

But again, we do expect mortgage to kind of recede to a more normal level in the fourth quarter. We think that is probably a one-quarter adjustment. We'll probably get to a baseline number in the fourth quarter or first quarter will sort of be a base for us going forward. And we feel like we can absorb that adjustment with the reduction in cost and increases in other revenue categories that we expect the coming quarter.

On the leasing business, we were very fortunate to hire an excellent individual with many, many years of experience in the leasing business, running the leasing business. And we hired him to come in here and build a small-ticket leasing operation that basically focuses on customers in our existing footprint. And we did a D&B credit score search of customers in our existing footprint that made a certain credit criteria and have either been in business 10 years or longer and have 5 or more employees, or been in business 5 years or longer and had 10 or more employees. And we identified 7,000 to 8,000 target commercial customers as a result of that. And we like the ability to offer leasing products to those customers because it's a product that is not broadly available in our market, and it's a new product to our product line. We also like our prospects for leasing, because we're making direct sales calls on that 7,000 to 8,000 fairly high-quality target customers, and we think that adds a new dimension to our business development efforts and the footprint that we have. This is A-grade paper. It is being underwritten with the same standards that our loan portfolio is being underwritten, so we don't anticipate it would have any adverse effect on our credit operations, and we think that it will grow to be a fairly significant piece.

In addition to leasing, we are doing two things that are new in our portfolio of loan products. In the last three quarters, we have begun to really promote a consumer loan product in our urban markets. When we came into the urban markets in 1998, 1999 -- and by urban markets, I'm basically talking about Little Rock, North Little Rock, and Fort Smith -- we did not promote or develop or design any consumer lending products for those markets, because we were focused on mortgage and commercial and commercial mortgage lending. As we have built out our branch networks, and now have the footprint in place, we've begun to become a much more consumer-oriented bank in those markets. And beginning this year, we began to offer home equity line-of-credit product -- again, it's underwritten very conservatively, and it really is focused on purely A-grade customers. And that product has began to generate some pretty good consumer loan growth.

In addition, within the last quarter, we have picked up an individual who is actively involved in another bank indirect lending program -- one of the big banks -- and we are getting into the indirect consumer lending -- again, focused purely on A-paper customers in our urban markets. We feel like that the leasing business -- the increased focused on direct consumer lending in our urban markets and this indirect business will contribute about 5 percent, and possibly as much as 10 percent per annum to our loan growth over the next five years by just simply broadening our product base and taking advantage of the fiscal infrastructure that we already have in place in a number of these markets.

Kevin Reynolds (ph).

Good morning, George. Just to talk about -- as we look longer term out there, I know we expect fairly stable rates for some time, at least on the short end of the curve. But I've asked you before, and I'll ask you again -- the mix of fixed versus floating in the portfolio at quarter-end, if you've got that number handy? And then also, if you could provide some additional detail on the fixed segment of your loan portfolio in terms of what sort of average life you've got so we can at least look for some long-term interest-rate sensitivity?

Okay, I can do that, and will be glad to do that. Kevin, as I have mentioned in our conference calls for a number of quarters now, we are intensely focused on trying to increase the percentage of variable-rate loans in our portfolio, and we've been doing a very good job of this. I think when I started talking about this -- gosh, I guess two years ago, that number was something like 12 percent. And as of the end of the current quarter, 31 percent of our portfolio was variable rate -- and that is up from roughly about 26.5 percent at the end of the last quarter. So we did about 4.5 times as good in the third quarter as our minimum goal of increasing that percentage 1 percent a quarter.

That also has been one factor that is contributing to a bit of the margin compression, and I can't quantify this, but obviously, we charge a lower rate on variable-rate loans than we do on fixed-rate loans, because we're not taking any interest-rate risk. And the focus of our staff in trying to move more and more credits to the variable-rate side and away from the fixed has contributed slightly to that margin compression. But it's also lowered the risk profile considerably as a result.

If you look at our last year's annual report, it gives you an idea on page 15 and page 16 of loan maturities, and on page 16 the expected cash flows and repricing at that time. Of course, this data is nine months old, and our percent of variable-rate loans has probably increased roughly 10 percent -- I don't remember what the year-end number was, but I'd say we're probably up somewhere around the 10 percent of the portfolio there, or more, since then.

So if you looked at that, approximately $316,000 (ph) of our loans would either be paid off or repriced within a year; 358,000 within one to five years, and only a million -- rather only (ph) 43 million at over five years. So we do a lot of 1, 2, 3 and 5-year-blend loans in Arkansas. And, as you know, is a cultural bias to do that in Arkansas because for years we operated under a usury law that didn't allow loans to really float. You could float, but you couldn't float over the maximum rate on the date the loan was made, and our usury law was very restrictive. So as a practical matter, you could float but you could really only float down and not up. So floating rate loans were not used prominently in Arkansas, except on first mortgage residential, which were exempted. And all other loans were generally set up as a fixed rate on the date they were made because they couldn't float over the maximum on that date. And as a result, to reprice them (ph) they were ballooned at various intervals in the future. If you did a renewal note -- a new note, when you renewed them you could legally set a new rate on the loans. And there's just a strong cultural bias in our customer base and among our lenders to set up loans that balloon in one year, or two, or three, or sort of maximum, five -- although we do a few more than five, most of them are set up as five-year balloons. And we are overcoming that, and I think you will see a continued increase in the variable-rate percentage of our portfolio.

All of that is factored into our interest-rate risk model, our simulation model we run quarterly. And as the numbers that have been reflected in our recent (technical difficulty) show, we do not have significant amount of exposure, even if rates rose instantly 200 basis points and stayed there.

So we feel like we are reasonably close to a balanced position. We're not quite as close to balanced as we were at the end of the year because prepayments have pushed those numbers around. But we're hopeful that with the roughly 4.5 percent increase in the variable-rate part of our loan portfolio in the last quarter, we will be moving back toward that perfectly balanced position.

Okay, and one other question just so I am clear on this. On the new trust-preferred you issued at the end of the quarter -- the way it reads, and I believe what you said was at least for the next nine months or so, you are essentially paying on two issuances -- the existing issuance of roughly 9 percent fixed, and the new floating rate trust preferred, but that we should expect some prepayment of the existing issue in 2004 potentially. And if that is the case, what impact will the additional interest expense have on your quarterly earnings per share as we go forward?

Well, you can do the math. $28 million at 4.07 percent, and that will be -- take 92 days divided by 365, and that will be the cost impact in the fourth quarter. Now, we basically have just put some additional securities on to offset that. Those securities give us a positive yield spread of about 125 basis points on that. So it's a positive spread, but it is a very low-margin spread between now and June or July of next year.

The existing trust-preferred, which is $17.3 million at 9 percent, is prepayable on the 18th day of June next year. And as I indicated, we would have about $517,000 of after-tax cost in paying that off if we paid it off on June 18th or July 1, whatever, next year from the write-off of amortized origination costs associated with that debt issuance costs. But we would -- assuming the difference between 9 percent and 4.07 percent, we would recover that in interest savings in 11.5 months.

Arielle Whitman.

Hi, George. Very impressive quarter, once again. I was wondering if you could just discuss the thought process of the -- why issue an adjustable-rate trust-preferred, versus the fixed-rate one at this sort of rate cycle -- point in the rate cycle?

Ariel, we could be wrong on that. But we looked at the cost of doing the fixed-rate versus the floater, we looked at our overall interest-rate risk position, and felt like we could still maintain at or very close to a neutral interest-rate risk position using the floating rate as opposed to the fixed. We looked at the cost differential and felt like the risk-reward ratio was in our favor on that, even though I know that we are at a very low rate level, and rates, at some point, eventually are going to rise from this level, and probably rise substantially. The cost differential to us still seemed to lead us in favor of the floating rate trust-preferred.

If you were to have issued a fixed-rate, around what level are you looking in?

Ariel, I don't remember. We looked at the numbers. In the sevens --

Okay.

I don't want to (multiple speakers) what the swap on it was, but it was somewhere in the sevens. The other thing is -- you know, we do anticipate that the majority 17.3 million of this will be used to pay off a 9 percent trust-preferred. So part of the logic was looking at that and saying, boy, you know, we've got 500 basis points almost of cost there, and that gives us a lot of room to float up. We still have sizable cost saving. So that was part of the thinking.

And that's June of next year when that is callable?

Yes, June 18th. We have to make that decision sometime, I think, between April 18th and May 18th. We cannot give notice more than 60 days in advance, I believe, nor later than 30 days in advance. So we will be looking at that real hard in that late April or early May quarter, and doing the math, and looking at the capital position. And assuming no material changes from the current environment, we would certainly expect the likelihood will be we would -- (ph)

Okay, thank you.

Eric Fell (ph).

Just wanted to get a little more granularity or insight into the securities portfolio. What -- I know you've mentioned that 31 percent of your total assets are variable rate. But in securities portfolio, can you sort of breakdown of variable versus fixed? And also, if you have seen any extension -- to what extent, I guess -- obviously you've seen extension, but to what extent have you seen extension in that portfolio as well in the last few months?

Let me clarify, Eric, that the 31-percent figure applies only to a loan portfolio. That's 31 percent of the loans are variable-rate. And I would add an additional piece of color on that that might be useful to you or others. Of the 31 percent that is variable, 44 percent of those are at their floor rates, and 56 percent of those can still float down. All of them can float up; none of them are at any sort of cap rate, of course.

On the securities portfolio -- the vast majority of that portfolio is a fixed-rate portfolio, and there are really two big components of it. One is CMOs, and the other is municipals. And the CMO that we buy typically have about a 3 to 3.5 average life, assuming a stable rate environment. We buy securities -- I think all of them pass the old FMED test or FFIEC stress test, risk test. I don't think we have any -- or if we have any, it is a small percentage that do not pass that test. And basically, because of the extension limitations of that test, in an up-300-basis-point scenario, those securities are projected to extend to somewhere between a 4.5 and a 5.5-year average life.

So there is some extension risk in the portfolio, but not a tremendous amount of extension risk. These are not be (technical difficulty) launches that go crazy and extend way, way out in an up-300-basis-point scenario.

These are more the early-pay tranche? These tend to be more of the early pay tranches?

There really -- a lot of things we buy are sort of that first-tier support tranche, which we think is a good trade-off of value and interest-rate risk for us in the portfolio.

Mark News.

Good morning, George. There's been a couple of deals recently announced in Arkansas. We just wanted to get your take on what you're seeing in terms of M&A over there right now?

Mark, as I have said before, we certainly want to look at augmenting our growth in de novo branching strategy with acquisitions. We want to do acquisitions but we only want to do them if they make sense for our shareholders. There have been a trio of deals announced in the last few weeks, and we have had a chance at one time or another to look at a couple of those opportunities. And we have put a proposal together on those that made sense to us and we thought would be beneficial for our shareholders. And obviously, we were not successful in that as far as making an acquisition. But I think we were successful as far as our shareholders go, in that we did not put together a proposal that would have gotten the bill done, but would have been detrimental to our existing shareholders.

So we are going to look hard at it, and we're going to pursue opportunities to make acquisitions that fit, really, in the 25- or 30-county area of Arkansas where we really want to focus our franchise. But, if it doesn't make economic sense for our shareholders -- if it's going to be dilutive instead of accretive, or if it's not going to -- even in the long run, because of the slower growth prospects, perhaps, of the acquiree company -- it won't help us achieve our long-term goals, then we are going to pass on the deal, or try to do it at a price that make sense. And if we can't do it, then we can't do it. We've got a de novo strategy that we have proven over the last nine years will work and will produce excellent results for shareholders. And if we can augment it, great; if we can't, we will just keep sticking with what we're doing here.

There are no further questions at this time.

Let me thank you guys for joining our call. We certainly appreciate your participation today, and your questions, and your interest in Bank of the Ozarks. Thank you very much. We look forward to talking with you again in about three months.

Thank you for joining today's conference call. You may now disconnect.