Bank Ozk (OZK) 2007 Q3 法說會逐字稿

Good morning. My name is Shanda, and I will be your conference operator today. At this time I would like to remind everyone -- welcome, everyone, to the Bank of the Ozarks fourth-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Blair, you may begin your conference.

Good morning. I'm Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the Company's results for the third quarter of 2007 and our outlook for upcoming quarters. Our goal is to make this call as useful as possible in understanding our recent operating results and future plans, goals, expectations and outlook.

To that end, we will make certain forward-looking statements about our plans, goals, expectations and outlook for the future, including statements about economic, competitive and interest rate conditions, revenue growth, including our goal of accelerating our rate of revenue growth in 2007 as compared to 2006, net income, net interest margin, including the effects of the relatively flat yield curve and intense competition and our goal of maintaining and possibly improving net interest margin from the level achieved in the third quarter of 2007, net interest income, noninterest income including service charge, mortgage lending and trust income, noninterest expense and our goals for decelerating our rate of increase in noninterest expense in 2007 as compared to 2006 and achieving positive operating leverage in the future, asset quality including the effects of the current economic and housing market conditions, changes in residential mortgage market conditions, future growth and expansion including plans for opening new offices, loans, lease and deposit growth and changes in our securities portfolio.

You should understand that our actual results may differ materially from those projected in the 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 the "Management's Discussion and Analysis" section of our periodic public reports, the "Forward-looking Statements" caption of our most recent earnings release and the description of certain risk factors contained in our most recent annual report on Form 10-K all as 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 our Chairman and Chief Executive Officer, George Gleason.

Good morning, and thank you for joining today's call. We are pleased to be reporting record net income for the quarter just ended. While this record was only a slight improvement over our previous quarterly record net income, we feel good about this accomplishment considering the current operating environment. We are also pleased that our third-quarter results generally reflect continued progress in achieving our key goals for 2007. Earlier this year we had stated four key goals for 2007, which are one, accelerating our rate of revenue growth; two, decelerating our rate of increase in noninterest expense; three, maintaining or improving net interest margin; and four, maintaining good asset quality.

We also stated that we wanted to get back on a record earnings pace by year end 2007 after pursuing our significant deposit branching and corporate growth initiatives in 2006.

Let me give you some specifics on our recent results. First, let me discuss our goal of accelerating our rate of revenue growth in 2007. Net interest income, which typically accounts for about three-fourths of our revenue, increased 3.1% for the year 2006 compared to 2005. In the first, second and third quarters of this year, 2007, net interest income has increased 4.7%, 7.3% and 10.7%, respectively, compared to the comparable quarters in 2006. That is exactly the sort of performance we had in mind when we articulated our goal of accelerating our rate of revenue growth in 2007.

As a result, we have achieved record net income in each quarter this year. The acceleration in our rate of growth in net interest income to date this year results from a combination of one, growth in earning assets, and that is primarily loans and leases; and two, quarter-to-quarter improvement in our net interest margin during the first two quarters of this year. Our net interest margin actually declined one basis point in the quarter just ended. I will discuss our expectations for future loan and lease growth and net interest margin in more detail in a few minutes.

Our efforts to accelerate our rate of revenue growth from noninterest income sources have had mixed results this year. We have seen good progress in regard to income from deposit account service charges and trust, but it has been a challenging year so far in mortgage. Income from deposit account service charges is our largest source of noninterest income, and last year this category of income increased 3.5% compared to 2005. In the first, second and third quarters of 2007 income from deposit account service charges has increased 22%, 20.1% and 21.1%, respectively, compared to the comparable quarters in 2006.

A number of factors have contributed to this increase in our growth rate of service charge income in 2007. These factors include enhancements made in late 2006 in our processes for applying and collecting service charges., the large increase in our number of deposit accounts from our 2006 deposit growth initiative and some small adjustments earlier this year in our service charge fee schedule.

Typically mortgage lending income is our second-largest source of noninterest income. During the year 2006 our mortgage income actually declined 3.8% compared to 2005, and during the first and second quarters of 2007 despite generally slower housing market conditions, mortgage income increased 21.2% and 4.9%, respectively, compared to the comparable quarters in 2006. However, during the quarter just ended mortgage lending income declined 25% compared to the third quarter of last year and 27.3% compared to the second quarter of this year. Both the direction and magnitude of this decline were disappointing.

In our view the third-quarter results were more significantly impacted by factors of market psychology than economic fundamentals. Let me explain what I mean by that. First, the tremendous media hype about problems in certain sectors of the mortgage industry seems to have made many buyers doubt their ability to obtain financing. For our customer base, which is typically customers qualifying for secondary market conforming loans, there is no problem in obtaining mortgage financing on good terms. Even many customers with somewhat marginal credit can still be easily financed through various secondary market programs, including a resurgence in FHA lending.

Secondly, the proliferation of publicity about housing market conditions nationally appears to have turned many buyers into bargain hunters. Clearly many buyers are negotiating harder, and many seem to be waiting for market deterioration before they buy. Now I would love to give you good guidance on where our mortgage lending income is going, but since at least in our markets, it seems that conditions are being driven more by market psychology than economic fundamentals, it is especially difficult to predict when we will return to a more normal environment.

Trust income is another important source of non-interest income, and we are pleased to have reported record quarterly trust income for the third quarter. During the year of 2006 trust income increased a very favorable 16.4% compared to 2005. In the first, second and third quarters of this year trust income increased 7.4%, 11.1% and 16.3%, respectively, compared to the comparable quarters in 2006.

A slowdown in new bond issuance in Arkansas has restrained our growth in corporate trust income so far this year. However, we have continued to see good growth in our personal trust and investment management business, and we expect growth in these areas to continue to drive overall growth and trust income in the remainder of 2007.

Let me conclude my remarks regarding these various revenue categories by saying that we feel the results so far this year reflect good progress in achieving our goal of accelerating our revenue growth rate in 2007.

Decelerating our rate of increase and noninterest expense is another key goal for 2007. During 2006 we invested heavily in our branching and corporate growth initiatives, which contributed to the 15.7% increase in noninterest expense in the year 2006 compared to 2005. In the first, second and third quarters of 2007 noninterest expense increased 8.8%, 7.8% and most recently 0.2% compared to the comparable quarters in 2006. Clearly this reflects that we are on track so far in accomplishing our goal of decelerating our rate of increase in noninterest expense in 2007.

In fact, our results have been even better than we expected as our absolute level of noninterest expense has actually declined in each quarter of 2007 compared to the immediately preceding quarter. While we will strive to continue to carefully control noninterest expense, it would be unrealistic to expect that the aggregate noninterest expense level would decline further. We want to continue to grow and expand our franchise, and this will require increases in noninterest expense as we add new people and new offices and otherwise spend to operate and build our business.

Our goal going forward will be for our growth rate of noninterest expense to be below our growth rate of revenue, thus achieving positive operating leverage. Our third key goal that we set for 2007 is maintaining or improving net interest margin. Of course this is closely related to our goal of accelerating our rate of revenue growth, which I've already discussed. However, net interest margin is so important that we think of it as a separate goal, and I want to talk about it separately, as well.

During the first and second quarters of this year our net interest margin improved 13 and 11 basis points, respectively, compared to the immediately preceding quarters. In our last conference call we stated that our short-term goal was to maintain net interest margin at the second quarter level, or hopefully improve it slightly over the next two quarters. We fell slightly short of that goal in the third quarter as our net interest margin declined one basis point.

At this point we have not seen a broad-based change in our environment for pricing loans and deposits. Unfortunately competition continues to be very challenging for pricing both sides of the balance sheet. The improvement in our net interest margin since the fourth quarter of 2006 is primarily due to two factors. First in 2007 we have moderated our deposit pricing somewhat following our deposit growth initiative in 2006, and we've allowed a number of higher cost deposits to roll off our balance sheet in favor of lower cost borrowings. And secondly, our loans generally reprice somewhat more slowly than our deposits, and with the Federal Reserve on hold with interest rate adjustments for the last half of 2006 and the first eight months of 2007, our loan pricing during the first half of this year started to catch up somewhat with our earlier deposit repricing.

As we suggested in the last conference call, we expect that further improvements in net interest margin will be more difficult to achieve in the near term. At this time our goal continues to be to maintain net interest margin at the third-quarter level or hopefully improve it slightly during the coming quarters. Our simulation model results suggest that we are almost neutrally positioned and the recent Fed action should have little impact on our net interest margin.

The fourth goal for 2007 is to maintain good asset quality. Our third-quarter asset quality ratios were very favorable and are consistent with this goal. Our strong credit culture and our commitment to good asset quality appear to be serving us well. At September 30, 2007 our ratio of nonperforming loans to total loans and leases was 19 basis points, and our ratio of nonperforming assets to total assets was 22 basis points. Our ratio of loans and leases past due 30 days or more, including past due nonaccrual loans and leases as a percentage of total loans and leases was 45 basis points at September 30, 2007. And our annualized net charge-off ratio was 17 basis points for the last quarter.

As of the end of the most recent quarter, our allowance for loans and lease losses equaled 564% of total nonperforming loans and leases. Our good third-quarter asset quality results might lead one to believe that we are operating in a very favorable credit quality environment. However, as I have said previously, the cumulative effects during the past two years of 425 basis points of FOMC rate increases, 50 basis points of course which have now been reversed, higher energy prices and slower economic conditions in many sectors, among other factors, are adversely effecting some borrowers.

In all of our markets except Northwest Arkansas I would characterize business conditions as generally good, although activity has slowed in recent quarters. In Northwest Arkansas a slowdown in residential lot and home sales has occurred, and that market is continuing to work through the oversupply situation. The good news for Northwest Arkansas is that there is by no means a cessation of residential lot and home sales, and the area continues to be a growing and economically vibrant market, which in due time should resolve the oversupply of houses and residential lots now existing in some submarkets and some price points.

In summary, accomplishing our key goals of accelerating our rate of revenue growth, decelerating our rate of increase in noninterest expense, maintaining or improving net interest margin and maintaining good asset quality are critical elements in our favorable results in each of the first three quarters of this year, including our record net income in the quarter just ended. These four goals will continue to be key objectives for the coming quarter.

Now let me turn our attention to several other subjects. Growth in earning assets, primarily loans and leases, is important in achieving our goal of growing net interest income. Loan and lease growth in each quarter this year has been below our expectations. Our quarterly loan and lease growth in the first, second and third quarters of this year were plus $46 million, $33 million and $60 million, respectively. Over the last four quarters our loans and leases have grown 13.9%, near the bottom end of our target range. Despite the slower growth in recent quarters, it appears that we have a very good pipeline for the fourth quarter, and we continue to believe that in the coming quarters our growth in loans and leases will on average be in the mid teens to low 20s annual percentage range.

Our investment securities portfolio is another source of earning assets, and as you will recall during the first quarter we were a net seller of investment securities, and we have found very few investment securities we thought were compelling values this year. This has been the primary factor in the $29 million decrease in our investment securities portfolio so far this year. As we have said a number of times before, we will be a seller of securities when we believe market conditions are conducive to selling and a buyer of securities when we believe market conditions are more appropriate for buying. We expect to continue to manage the securities portfolio with the same mindset.

After record setting deposit growth in 2006 and very strong deposit growth in the first quarter of 2007, our deposit have actually declined in each of the last two quarters. This is not concerning to us. We have simply been trying to maintain or improve our net interest margin this year and over the last two quarters we have allowed a number of broker deposits and other high cost deposits to run off in situations in which we could replace those deposits with lower cost borrowings.

We continue to expect that our deposits will grow over time to the extent that deposit growth is cost effective and needed to fund our growth in earning assets. And we expect to use brokered funds and borrowed funds within reasonable limitations when borrowings are a cheaper source of funds.

Our goals for the coming quarters include continuing to achieve good growth in earning assets primarily loans and leases and maintaining or perhaps improving slightly our net interest margin from the third-quarter level. If we can accomplish these goals, then we have the necessary elements to continue to achieve improvements in net interest income each quarter and of course this is critical to our achieving earnings growth.

We have continued our growth in de novo branching strategy in 2007. In addition to our Hot Springs Arkansas office which opened during the second quarter, during the third quarter, we replaced our original temporary office in Frisco, Texas with our second permanent office in that city and opened a second banking office in Fayetteville, Arkansas. In the fourth quarter, we expect to open our third banking office in Rogers, Arkansas.

At this time we expect to open approximately three new banking offices in 2008 including our new corporate headquarters. Given the fact that 53% of our total banking offices have been opened in the last four years and nine months including the record number of new offices we opened in 2006, we believe we can maintain good growth rates while opening fewer offices in both 2007 and 2008.

In closing, let me state again that we are very pleased with our record third-quarter net income. Now that we have once again achieved record quarterly net income, our goal will be to continue to improve earnings each quarter. We think this is a reasonable goal. But given current economic, housing market, mortgage market, competitive and yield curve conditions, we are very cautious in our optimism. Given the considerable headwinds and uncertainties related to business, economic, and interest rate conditions, we presently see room for only modest EPS growth in the fourth quarter.

We are also very cautious in our outlook for the first quarter of next year. The first quarter as many of you know, is always a challenging quarter as it is usually a soft quarter for income from deposit account service charges, mortgage income and loan growth and also typically includes some noninterest expense items unique to the first quarter.

Here is the bottom line. We want to continue to report record earnings each quarter and that is our goal and we think it's a reasonable goal but we should all be cautious in our optimism for the coming two quarters and until conditions improve.

That concludes my prepared remarks. At this time we will entertain questions. Let me ask our operator, Shanda, to once again remind listeners how to queue in for questions. Shanda?

(OPERATOR INSTRUCTIONS) Barry McCarver.

Good morning, George, and great quarter.

Thank you, Barry. Good morning.

George, just on your last comments there about you said in your comments, modest EPS growth in the next couple of quarters. I'm assuming you mean linked quarter and sort of how they would move up from compared to the $0.50 you had in the third quarter. Is that what you mean?

Yes, thank you for clarifying that, that is correct.

All right. A second question, just going back again you touched on the difficult environment for gathering deposits. But in terms of the margin, seeing deposits come down 6% linked quarter and running that loan to deposit ratio up to 89% I would have suspected the margin would have been just a little bit stronger than it was. Could you give us a more kind of specific details into -- on the deposit line? It certainly indicates that that was a much more competitive environment than what I thought was out there.

Well, we had hoped to see more moderation in deposit pricing in most of our markets than we have seen. That has been very slow to come about. And I think still has hopefully a ways to go. We were also surprised when the Fed did make their 50 basis point cut that some of our competitors did not adjust deposits as quickly or appropriately as we thought they should. So, that is part of my comment about being cautious about being able to improve that margin and also reflecting in my comment regarding continued challenging competitive conditions out there.

Yes. So was there anything specifically large in the way of deposits that were running off in the third quarter that you just let mature and go, or it was just a little of everything?

It was significantly broker deposits and other higher cost CDs were the principal sources of that. You saw that in the change in the mix of our deposits, for example, last quarter our average CDs were 67.2% of our total deposits and this quarter on an average basis they were 66.4%. So a decline in CDs and the mix of deposits and that was the principal source of runoff.

Okay. So the bottom line is it sounds like a flat margin is what we can expect for the next couple of quarters all things being equal hopefully?

Again, our guidance was we hope to maintain it at the third-quarter level and improve it slightly. But generally flat is our expectation plus or minus a tad.

Okay. And then just secondly on the expenses, continues to be very impressive the way you are holding expenses down. I am surprised that so much of it is coming out of the salaries and bonus. I know part of that must be related to commission base on the mortgage business. I know probably some of it relates to some of the hiring you did in 2006. Can you break that down just a little bit further so we get an idea of what to look for next quarter?

And then in addition to that, I'm assuming you're going to have some bonus accrual and potentially some catch up in the fourth quarter as well?

Well, that's going to depend purely on our earnings whether or not we have bonus accruals and catch up. We have had fairly nominal bonus accruals in the second and third quarter, I think it was $100,000 we accrued for targeted bonuses in the second quarter and a think it was $45,000, Paul, is that right? Yes, $45,000 in the third quarter. And we want to get back on a program of either paying our general cash bonuses or if we can't pay the general cash bonuses, we want to get back on a program of paying targeted bonuses to employees who are performing at a particularly high level or making a particularly significant noteworthy contribution to the Company. And we describe in our proxy material those two categories of bonuses if you want to refer to that for more clarification on that.

So I'm hopeful that we will have bonus accruals in the fourth quarter and in future quarters subsequent to that. But as you know, we have minimum earnings targets that we want to hit in order to accrue bonuses and obviously we slightly exceeded those earnings targets in Q2 and Q3 allowing us to accrue the $100,000 and the $45,000 in those quarters. So we have targets for Q4 and Q1 and the other quarters of next year and we've got to exceed those earnings targets.

Now I will tell you if we exceed those earnings targets, I'm generally inclined to put a large part, if not all of that excess in the bonus accrual because I do want to get back on that bonus accrual. And that's in part of our mindset in being reasonably cautious in our guidance for EPS growth. We certainly feel like our earnings trajectory has been very good in the first, second and third quarters of this year and we're on the path of accomplishing what we want to accomplish.

I think it's prudent to realize that we are in a tough operating environment and not to get carried away and ratcheting up future earnings projections too aggressively.

Yes. And then just lastly, second question I asked the recorder, George, but nothing in the loan book in terms of asset quality that's popped up that has you worried anymore than what has been there recently?

And I will give you the answer I always give you, Barry, is I'm a credit guy by history and I always worry about everything. But, no, I think that the asset quality ratios for the third quarter are very reflective of the condition and quality of our portfolio. We worked very hard on asset quality.

To give you a little color on that I would say those ratios are depending on which ratio you look at slightly better or slightly worse than comparable ratios a year ago. I would tell you that we are spending more time on asset quality this year than we did last year and that is just a reflection of the fact of what I commented on in the prepared remarks that the higher interest rates, higher energy prices, generally slower economic conditions are causing some borrowers on the margin to struggle significantly. And we sold quite a bit of OREO in the third quarter including -- had a number of houses, I think we sold five houses from our OREO portfolio in Northwest Arkansas and liquidated a small church and a small retail facility that we moved out of OREO in the quarter.

So it is requiring a lot of work. Our guys are doing a good job. I think managing problem assets is a strong skill set that we have as well as maintaining a strong credit culture and doing a good job of underwriting. So all those skill sets are proving to be pretty valuable in the current economic environment.

Very good. Thank you, sir.

Charlie Ernst.

Good morning.

Charlie, how you doing?

I'm doing great, how are you guys doing?

Fine, thanks.

Good. George, my first question is on your loan growth outlook, you know the numbers are coming in a little bit later as you pointed out and I guess there is more concern about the economy yet you still stick with sort of the higher targets. Can you share any color with us as to why you still feel comfortable with those higher targets?

Well, yes, I will be happy to share that with you. I think an important consideration there is that we did enter over the last year to two years we've really entered or ratcheted up our presence in four new markets; significantly Northwest Arkansas is one of those markets. It's not contributing much growth at this time because of the slowdown in economic conditions there. Garland County Arkansas, the Texarkana and Arkansas and Texarkana Texas area and then Metro Dallas area.

And the Metro Dallas market both by our real estate specialties group that is headquartered in Dallas and our more Metro Dallas retail offices of which we opened the second of their offices this last month is providing a significant chunk of growth for us. That was very evident in the third quarter when our percentage of our loans in Dallas increased from 11.6% at June 30 of this year to 14.6% at September 30. So in that quarter, Dallas increased or Texas including our Texarkana offices as well there, increased their contribution to our loan portfolio by 300 basis points. And as a result, Arkansas loans in our portfolio went from 83.1% to 80.4%, a 2.6% decline, 260 basis point roughly decline there in Arkansas.

So the Texas economy is very good, the Metro Dallas area economy particularly is very good. We have a large presence there. It's a fairly new presence. Our guys seem to be gaining traction there and I suspect that we will also see some growth from our Charlotte office and from our Metro Little Rock area offices.

So we feel like there is still some really good growth opportunities available to us. Our growth so far this year in each quarter has been offset to some extent and reduced to some extent by a considerable number of payoffs that we've experienced. We have an ongoing program of pruning the portfolio. We try to move credits out of the portfolio when we see signs of financial weakness beginning, when we see deteriorating credit trends and we talk with management and talk with borrowers and they are not providing us the kind of answers and comfort and direction that we want. We are pretty aggressive in moving loans out of the portfolio.

So as economic conditions have slowed over the last year or so, we've seen a few more credits following that category than we have seen following that category in the prior few years and that has led to a little bit more aggressive pruning and that has tended to provide some headwind to our growth this year. And secondly, we have a large construction and development portfolio and for obvious reasons a lot of those guys are carrying less inventory.

So what I would tell you is there are some headwinds as folks borrow less under their -- compared to their prior borrowing arrangements because they are carrying less lot inventory or less construction inventory. Slower economic conditions are causing a little more pruning than normal of the portfolio so those are headwinds.

On the flip side, we've got really good lending teams. We're in some really good new markets where economic conditions are good. So that is the positive things that give us optimism that we can continue to maintain the midteens to low 20s growth rate on average.

Can you just comment what the construction number was during the quarter at period end?

Yes, I can if I can put my fingers on that. I don't -- right here it is. The construction and land development loans at September 30 were $597 million, that was 32.9% of the portfolio, up from 32.0% of the portfolio at June 30. And again, as would be evident from the percentages that I gave you on the state to state mix of the portfolio, most of that growth occurred in our Metro Dallas or Dallas real estate specialties group offices. And what we really like about the product that we originate in those offices is an almost every case we've got lots of equity in those projects. There's a lot of equity money, a lot of wealth in Texas and our Texas loan portfolio typically has a much higher equity contributions from borrowers than we see in Arkansas.

So we like that sort of business and I think that's one reason you'll continue to see our appetite and our portfolio of Texas loans grow significantly.

How much of that 597 is land, George?

I could not -- I don't have that number, Charlie.

Okay. And then just one clarification. You mentioned your operating leverage goal, positive operating leverage. Was that on an annual basis for the full year? Was that sort of a linked quarter goal?

No. I think that is an annual goal and you will see that number bounce around from quarter to quarter for various reasons. You've asked questions about bonuses in the past and Barry asked the question about bonuses if we had a particularly robust Q4 for example, we might make a particularly robust bonus accrual. Or if we had some extraordinary income from some source, unusual income in Q4, we've might use that to buttress bonus accruals and that would actually -- might lead to negative operating leverage as far as the efficiency ratio goes.

But over time, our goal is to achieve positive operating leverage. We still have a longer-term goal of getting to a 40% efficiency ratio and certainly the interest margin environment we've been in the last couple of years has caused us to not talk much about that and not view that as a near-term achievement. But over a period of several years, we still want to get to 40% efficiency ratio.

Okay and then my last question is do you have any -- I know that you said most of your mortgage business is kind of in the conforming space. But do you have any guesses as to about what percentage that is? Is it 90% or 95%, somewhere around there?

It is well north of 90%. I would say it's in the 95% plus range. I don't have third-quarter data but last year we originated I think about $10 million of subprime or Alt-A mortgages which we sell immediately nonrecourse. We've got them sold when we commit to them so we are not taking any portfolio risk. And that was about 5% of our total $174 million or so mortgage originations last year.

Great, thanks a lot you guys.

Andy Stapp.

Good morning. Last year you opened a record number of offices, just wondering if you can give us and update on how they are performing?

I would say as in any case where you open 11 offices like we did last year, they are performing with mixed results. Again, I would tell you our Texarkana Arkansas and Texas offices, our Frisco offices are performing well. Let me clarify that. I would say Texarkana, Texas and Arkansas offices we opened are doing very well. That's turned out to be a very competitive environment. But guys are generating good growth and good additions to the number of accounts and doing well there.

Our Frisco office that we opened last year we've really been sort of slow balling that and the reason was is the office that we opened just a couple of months ago, a month ago I guess, will be our headquarters for that office. And right after we opened the Frisco office that we opened, they started doing a whole bunch of road work right in front of our facility and access was very difficult. So we decided to not aggressively push that office to just slow play that office until the road work got done which I think is all done now. And until we opened this office, the headquarters office down there in September.

So we will begin really in earnest to push that office, so that office has been very slow to develop. Our Hot Springs offices are doing very well particularly on the deposit side. And our Northwest Arkansas offices are as you would expect from the economic conditions up there ramping up at a slower rate than what we would have expected because things have slowed down up there considerably.

The good news and I think the more important news is that I think all these offices are well situated in markets that have strong long-term growth potential. So whether or not they've outperformed our expectations as a few have or underperformed our expectations as a few have, I think the long-term prospects for all of them are very good.

Good. And when do you plan to open your new corporate headquarters?

That will probably be completed in November or December of next year. So that really has no significant bearing on our '08 operating results until the last month or two of the fourth quarter.

Okay.

I don't think -- while that is a big new facility and it will bring some higher overhead cost, it will also bring some efficiencies and some reductions in cost. I've got folks in two rented spaces in town now in other office buildings where we've run out of space in our existing headquarters and we've pushed people out to other leased space and other buildings and of course that lease cost will go away and offset to some degree the cost of the new facility.

And our existing facility that we're in now, we're not quite sure what we're going to do with that yet. We would very much like to keep the retail banking office downstairs. We think we will need this facility again in the future and potentially we will lease it for a period of time until space is needed in it again. Or we think we own it at a very favorable cost basis and if a really good offer to buy it came along, we would sell it.

So I think through the elimination -- either leasing this space or eliminating the cost of headquarters we're in now by selling it and eliminating the cost that we're expending for lease space for other office buildings where we've got folks stuck now and achieving some productivity efficiencies by having all of our people back together and having room to do some things that we can't do right now in our headquarters facility, I think we will mitigate a large part of the monthly operating cost of that new building with some savings.

Okay, great. That is all for me. Thanks.

David Bishop.

Hey, good morning, George, how are you doing?

Doing fine. David, how are you doing?

Not too bad. First question in terms of loan pricing out there, obviously with the disruption in the secondary markets we saw with the liquidity issues in the early to mid part of August there -- had talked to some of our management team and some of them had been hopeful to see an improvement in terms of some of the risk-adjusted pricing out there, maybe some of the conduits, some of the insurance companies that stopped picking up the phones there.

Have you see any sort of evidence there as of yet in terms of on the loan pricing side? Obviously loan yields are down here I would assume not. I guess I'm somewhat surprised at this stage of the credit cycle and to your overall commentary we haven't seen that translate through yet to loan pricing.

Well we are beginning to see some of that both in volume opportunities and in pricing. And let me try to explain all that so I can help you understand the nature of the comments that I made. First, we are seeing some opportunities to do some loan business with folks that would typically not use bank financing. They would typically be Wall Street money that would be providing their financing at very low rates. And as you said, a lot of those money sources have dried up because perhaps they were overly aggressive in the past and they've got some problems and issues that they have to deal with so they are turning off the spigots.

And customers who might not have accepted our equity requirements or loan covenant terms or pricing in the past we're getting some shots at some pieces of business from really primo high-end, high net worth borrowers that we would not have had a shot at even talking to them about doing their business in years past. So that is one reason to follow up on Charlie's question I guess that we are somewhat optimistic about the high teens to low 20s loan growth rate going forward, I think we're going to have some business opportunities that we wouldn't have had a year or two ago.

In regard to pricings, we are seeing in some categories of larger commercial credits that are really high quality credit LIBOR based pricing and we're seeing that pricing up 20, 30 basis points or so where those loans would have been priced a few years ago or a few quarters ago, actually. And that is -- I think that augurs well for the growth prospects of our Dallas area offices and our Charlotte area offices and also the margin prospects of those offices.

That is being somewhat offset in Arkansas where we still have 80% of our loan portfolio where the significant slowdown in loan opportunities in Northwest Arkansas and the fact that Arkansas is a heavily banked state, seems to be creating even more aggressive competition, unfortunately, from the top tier players in Arkansas who were getting loan volume from Northwest Arkansas and a lot of that volume has dried up so they are becoming more aggressive and trying to steal business away in other markets.

So that is providing some challenges on particularly good credits and some of these other markets. So it's -- that's why I said we've not seen really a broad-based change in competitive pricing conditions. In some instances it's gotten better and we're seeing opportunities to get 20 or 30 or 40 basis points better yields than we might have gotten a few months ago, a few quarters ago. And in some instances, we're seeing usually aggressive competition because the pie of available high-quality, particularly larger loan in Arkansas has shrunk for some lenders and they are trying to make up for that with aggressive pricing in other markets. So it's a challenging environment out there.

Great color. One follow up I guess, Texas versus Arkansas, you're still seeing visibility there to price in loan fees in terms of the construction credits and other commercial credits relative to Arkansas where I guess there has been a little bit more of a legacy type resistance in that type of pricing?

Yes.

Okay, great. Okay, that's it for me.

Leo Harmon.

Good morning. Can you talk a little bit about whether or not loan growth in the quarter was allowed to accelerate because of the Fed toward the end of the quarter? You talked a little bit on the previous question about seeing opportunities that 20 to 40 basis points higher in profitability. Did that give you an opportunity to add more loans toward the end of the quarter?

The Fed action had no effect on our loan growth whatsoever. Our guys are charged with this general instruction, we are a lending oriented company and I would say lending is our best skill and our guys operate under this protocol and that is to make every good quality, good yielding loan you can make consistent with safe, sound and prudent banking practices. And the guys have a constant green light to make loans that meet our underwriting standards and our pricing standards and are otherwise documented serviced and managed in a safe, sound and prudent manner.

So there is -- in our Company, there has never been a restraint or limitation on that. The guys have a constant green light to go do that. So the Fed action had no change in our policies there at all.

Okay. You talked a little bit about deposit prices still being relatively competitive even after the cut. Historically how long has that taken to bleed through competitively and what are you seeing differently this time?

Leo, I don't know that I can intelligently answer either one of those questions. We are in different markets to a great extent than we have been in the past. We entered four new markets last year. So I don't know that we can give you an apples-to-apples comparison of what has happened in the past and what has happened this time.

I would tell you and just reiterate the comments that I made earlier and that is that I would have expected in response to a 50 basis point Fed cut, I would have expected to see a little more moderation in deposit pricing from a number of our competitors beyond what I saw. We still got competitors in some markets that are pricing CDs -- Susan, into the 550 range?

560.

550 and 560 APY range. And I just don't see any need for that. It is surprising me that we've still got competitors n doing that. Now there has been a general reduction in rate since the Fed moved it's just not been as much or as fast as I would have thought was prudently appropriate by people that are interested in their bottom line.

Fair enough, thanks.

Brian Martin.

Good morning, George.

Good morning, Brian.

Say, just a quick question. Just on the growth over the last two quarters on the loan side specifically within the Texas market, I guess given some of what your commentary talked about that Northwest Arkansas and Arkansas in general, can you talk -- maybe you've done this and I'm just not aware of it. But maybe what your short- and long-term goals are as far as your Texas presence? Is it specifically targeted at Dallas? Do you go elsewhere given the growth you are seeing down there? I guess what color you can provide there?

We basically have three strategies in place that we are pursuing for Texas. One of them is what we call our real estate specialties group and we have a lending team that is located in Metro Dallas in the Preston Center are there and these guys have substantial experience and contacts and knowledge about larger commercial credits. We've been doing this now for several years there. And this office is the principal contributor of our loan growth in Texas.

I've talked at length about this office at various times and this is a very important part of the future growth picture of our Company. So those guys are focused on larger commercial real estate transactions including construction and development lending transactions with very high-end developers and borrowers, pretty significant customer profile for their customers. That office we would hope some day would have 100 to 125 customers that it serves, very high-end customers including folks that you would find in the top ten nationally and development categories of different kinds. And that office has been the largest contributor of our loan growth this year.

The second strategy is what we call the Metro Dallas strategy and it is really a more traditional retail banking operation. We have two offices now both in Frisco, Texas that will fulfill the strategy and it is a strategy to do in the Metro Dallas area in that 9, 10, 11 county area, essentially what we've done in Arkansas in the past and that is to have a really active lending and deposit retail bank that has a significant commercial book of business associated with it. And generates trust prospects and cash management customers and all that.

And then the third strategy for Texas is more of a midmarket strategy where in Texarkana Texas and Texarkana looks a lot like Paris and Arkansas or Fort Smith Arkansas as far as its economic profile. We've got a great guy that leads that. We got some great guys leading all three of these units for us. Our expectation is that in probably 2009 or 2010, we will expand into another Texas City in East Texas from that office and that those guys will develop over time a pretty significant network of offices in the second tier Texas cities -- that below your Dallas, Houston, San Antonio, Austin type markets. And your second-tier Texas markets much as we have in many of the top 20 cities in Arkansas.

So we are approaching it from all three of those directions and we think all three of those strategies are going to serve us very well. They are all off to wonderful starts and we've been a couple of years in Texarkana, three years in Frisco and I guess three or four years now with real estate specialties group. Those are all developing very well and we sort of ramped them up slowly and really made sure we understood what we were doing and that everybody was on the same page. And I think they are poised for fairly significant growth.

As a result, we believe that Texas will contribute a disproportionately large percentage of our Company's growth going forward. Now we still have some Arkansas offices to open but as we commented in the first quarter when we made a decision to not open an office in Jacksonville Arkansas and sold that site and entered into an agreement to settle the long-standing dispute regarding that branch application, in Jacksonville we made the comment, I believe that part of our decision there as we looked at our opportunities in Texas, we saw those as better than the opportunities for that Jacksonville office. And as a result, decided to abandon that effort and we booked pretty nice little gain associated with abandoning that effort in preference for being able to open another office more quickly in Texas.

And we continue evaluate that on an ongoing basis and there may be one or two or three more Arkansas sites that as time goes on we elect to sell and part of our mindset for that decision could very well be that we continue to think gosh, relative to what we might do with a new Texas office, that one might not do as well as one in Texas.

So we are constantly evaluating that and our experience in Texas has been so good that we are just very encouraged about our prospects there for the future.

Okay, I appreciate the color. Just a couple other questions here. The variable rate versus fixed rate loans, can you give the breakdown at quarter end?

Yes, at the end of the quarter 48.99%, so we will just round that off to 49% of our loans were variable rate loans. That is up several percentage points I think about 4 or 5 percentage points from the prior quarter. And that again is a function of the fact that most of our growth in the third quarter came from Texas because we find it much easier to get variable rate loans in Texas. In Arkansas there is just a strong customer desire to have fixed rate loans.

So the growth in Texas is also tending to accelerate the growth in the variable rate parts of our portfolio.

Okay and how about the -- can you comment about the percentage of loans that are tied directly to prime -- especially given the Fed rate cut here?

I don't have that number handy. We will try to put that in the Q or something and give you that number. But the majority of our loans historically have been tied to prime rate as an index which of course is unfortunate that they weren't all tied to LIBOR given what has happened to the spread between LIBOR and prime recently.

But in our Texas portfolio, for example, a lot of our loans there and I would say a growing percentage of our Arkansas loans are becoming LIBOR based credits but right now the preponderance of those loans that are variable are tied to prime rate. So as a result, we incurred a 50 basis point reduction in the yield on those loans and that -- since our CDs are fixed rate, we will have to roll over CDs for some period of weeks to offset that reduction in that prime rate. It will take a little while to catch up with that.

Okay and just the last thing. The C&I balance at quarter end, do you have that?

Yes I do. The C&I portfolio at quarter end was 9.5% of loan portfolio, down from 9.8% as of June 30. Now that was essentially unchanged in dollars. We were down $400,000 from $172 million to $171.6 million in the C&I book in the quarter. But because of the growth in the real estate side of the portfolio, the C&I piece went down percentage terms by 3/10 of a percent. Total real estate loans at quarter end were 81.5% of our portfolio compared to 81.0% at June 30 and 81.6% at the end of last year.

And maybe one last thing if you have it. You talked about the brokered CDs in the quarter. Could you just give what level you are at there? And then you talked about I guess maintaining some type of reasonable level there. I guess can you define or give a little color on what you view as reasonable? And I will hang up and I appreciate your help.

All right, very good. Let me see if I can get you that information. Total brokered CDs at September 30 were $253 million and to give you a comparison at June 30, that number was $356 million. So a $103 million reduction in brokered CDs during the quarter.

And as far as what constitutes reasonable, certainly we were not uncomfortable at all at the $356 million level and I actually wouldn't be comfortable -- uncomfortable at a level higher than $356 million. So I don't think that is a significant constraint on us and really when I said within reasonable limits, what I was really referring to principally was borrowings.

We have a policy that we will use our Federal Home Loan borrowing capabilities up to a high level. We wouldn't mind being 300 and something million or so borrowed from the Federal Home Loan bank but we have a policy of always keeping a $75 million of cushion on those borrowings. We always want to have at least $75 million more Federal Home Loan borrowing capacity than we have utilized at any time. Plus we always want to have our full Federal reserved discount [window] primary credit borrowing capability intact and we maintain a number of Fed funds lines of credit that we also want to have intact.

So the limitations are there as we have a number of internal guidelines on secondary sources of liquidity that we want to maintain at all times for emergency purposes and subject to those limitations, we would continue to increase borrowings and brokered deposits.

Okay, thanks very much, George.

Thank you.

Andy Stapp.

Yes, just have one other question if you could just provide the duration of your securities portfolio at September 30?

Modified duration of the securities portfolio at September 30 is estimated by our accounting provider for that [FT] and financial was 5.31 years.

Okay, great. That is all I have. Thank you.

David Bishop.

Yes, George, one follow-up circling back to Texas. In terms of expansion there, is the cost of acquiring commercial lending talent there still relatively prohibitive and has that raised any hurdles in terms of is that impeding your growth there or are you sort of happy with the trajectory you are projecting here in terms of your ability to grow there over the future?

Well, talent is not cheap there but I wouldn't characterize the cost of it as prohibitive. In fact we added another really high-quality lender, very experienced high level guy that we picked up from another bank on Monday of this week. And we are very excited about that. He is already having some significant conversations with some very desirable new lending prospects. So we are very optimistic about that.

Certainly as I've said a number of times, David, the key to our Company's future success is being able to continue to add the talent of the nature and volume that we've been able to add talent in the past. And it is always a challenge in every market to find the right guys and then to hire those guys and we've had a good track record of doing that. We're encouraged with the three teams that we have in place in the various Texas markets now. We're encouraged by the leadership of those teams and the growth and potential and capabilities of those guys.

So we are feeling pretty good about it. Certainly we're always looking for talent and we just got to continue to always look for talent and add good talent wherever we can find it, whenever we can find it.

Great, thank you.

At this time, sir, there are no further questions.

All right, there being no further questions, let me thank all of you for joining the call today and tell you we look forward to talking with you in about 90 days. And we will see you then. Thanks very much. Have a good day.

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