Bank Ozk (OZK) 2008 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Bank of the Ozarks first-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).

I would now like to turn the call over to Ms. Susan Blair of Bank of the Ozarks. Please begin your conference.

Thank you and good morning. I am 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 first quarter of 2008 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, housing market, competitive and interest rate conditions; revenue growth, including our goal of achieving revenue growth at a rate in excess of our rate of increase in non-interest expense and thereby achieving positive operating leverage; net income; net interest margin, including our goal of maintaining and possibly improving net interest margin from the level achieved in the fourth quarter of 2007; net interest income, including our goal of improving net interest income in each quarter of 2008; non-interest income, including service charge, mortgage lending and trust income; non-interest expense and our goals for maintaining our rate of increasing non-interest expense below our rate of revenue growth; asset quality, including expectations for our net charge-off ratio, future growth and expansion, including plans for opening new offices and a new corporate headquarters; 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 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 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 were revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

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

Good morning and thank you for joining today's call and allowing us to discuss our first-quarter results, which reflect some significant accomplishments as well as the challenges posed by the current economic environment. We have a lot to talk about so let's get right to the details.

Net interest income is our largest source of revenue, accounting for 80.9% of total revenue in the quarter just ended. In our January conference call, I stated that one of our goals was to achieve record net interest income in each quarter of 2008, and we continue to believe that is a reasonable goal. We said that we expected to accomplish this goal primarily by doing two things -- first, growing loans and leases from the low teens to the high teens in percentage terms; and second, maintaining or possibly improving net interest margin from the 3.47% level achieved in the fourth quarter of 2007.

Our first-quarter results met or surpassed this guidance in all respects. Our net interest income in the quarter just ended increase to 19.2% compared to the first quarter of 2007, and it was up 6.6% from the fourth quarter of 2007. This gave us our fifth consecutive quarter of record net interest income. Since net interest income accounts for such a large percentage of our total revenue, achieving record quarterly net interest income is of paramount importance in achieving our larger goal of returning to a level of record quarterly earnings during 2008.

Improvement in our net interest margin was an important contributor to our record net interest income. Our first-quarter FTE net interest margin of 3.69% was up 34 basis points from the first quarter of 2007 and up 22 basis points from the fourth quarter of 2007. We were very pleased with this 22 basis-point linked-quarter improvement, which was exactly two times what our board-approved internal plan had projected. Interestingly, half of this improvement is a result of a favorable spread achieved on the unexpected addition of a large volume of tax-exempt investment securities, and half of the improvement is due to better spreads between our loans, leases and our other securities and our deposits and other funding sources.

Our excellent growth in earning assets, both loans and leases and investment securities, also contributed significantly to our record net interest income. Loans and leases were up 15.0% compared to March 31, 2007 and up 5.9% compared to December 31, 2007. The year-over-year growth percentage is right in line with our recent guidance for loan and lease growth to range from the low teens to the high teens in percentage terms. If you annualize our first-quarter loan and lease growth, you get a 23.8%, well above our recent guidance range.

Of course, loan and lease growth tends to vary significantly from quarter to quarter, so annualizing one quarter's results may not the particularly meaningful. However you look at it, our first-quarter loan and lease growth met or exceeded guidance. With the slowdown in economic conditions nationally and operating as we are in a much more challenging portion of the credit cycle, one might be surprised by this level of growth. Of course, economic conditions and credit cycle conditions are making it harder, in some respects, to find good-quality credits. On the other hand, these conditions have led many competitors to withdraw from the market because of liquidity, asset quality or other issues.

There are still many good-quality loan opportunities, and the recent changes in the competitive landscape have resulted in a normalization of credit terms and loan pricing in many cases. For example, the vast majority of our first-quarter loan growth involved transactions which included equity, cash equity, or subordinated debt invested by the borrowers or others totaling 35% to 45% of the total project cost. These loans also had relative pricing 100 basis points or more above where comparable loans might have been priced just a few quarters ago. After several years of having to compete begins very aggressive credit terms and the loan pricing, these signs of normalization of credit terms and loan pricing are very welcome. If they continue, they have favorable implications for future loan growth, credit quality and net interest margin.

In addition to good loan and lease growth, our earning assets got a boost late in the first quarter from the addition of tax-exempt investment securities. In our January conference call, I said that we were not then expecting substantial growth or a shrinkage in the size of our investment securities portfolio in 2008, but that we will be a buyer of securities when we believe it is an opportune time to buy, and we will be a seller of securities when we believe it is an appropriate time to sell.

In the last week of February and throughout March, we found what we believe were unusually good buying opportunities for certain tax-exempt securities. The opportunity to acquire these high-quality, tax-exempt securities at very favorable yields is due to the unusual market conditions in recent months. Although most of these securities were not on our books, or were on our books, pardon me, for only the last month or so of the quarter, they provided a nice boost to net interest income and net interest margin. We know that a portion or perhaps a majority of these securities will be called or paid off during the second quarter. If this occurs, our securities portfolio could shrink back toward the December 31 level. On the other hand, if we can continue to find unusually good purchase opportunities, our securities portfolio might stay at or near the March 31 balance or even increase further.

We're just pleased that the recent market turbulence is allowing us to own, even if only for a short time, a good volume of high-quality assets with unusually favorable yields.

Let me shift quickly to non-interest income, which in the aggregate was down 14.0% compared to the first quarter of 2007 and down 14.2% compared to the fourth quarter of 2007. The adverse comparison to last year's first quarter is due primarily to two things. First, in the quarter just ended, we had net losses of $73,000 from sales of investment securities and other assets, compared to net gains of $372,000 in the first quarter of 2007. Secondly, in the first quarter of last year, we benefited from $500,000 of other non-interest income from the settlement of a contested branch application.

The adverse comparison to the fourth quarter of 2007 is also due primarily to two factors. First, income from service charges on deposit accounts and trust income were lower in the first quarter just ended compared to the fourth quarter of 2007, as is typically the case in the first quarter of each year due to seasonal variations. Second, in the first quarter of 2007, net losses of $73,000 from sales of investment securities and other assets compared to net gains of $567,000 in the fourth quarter of 2007.

More importantly, however, if you look at our three main components of non-interest income in the quarter, our results were modestly favorable. Specifically, service charges on deposit accounts, which are our largest source of non-interest income, increased 1.3% in the quarter just ended compared to last year's first quarter, but principally due to seasonal factors decreased 9.6% in the quarter from the record achieved in the fourth quarter of 2007.

Our initial 2008 guidance for service charges on deposits was that they would increase in a mid single digit percentage range. Based on our first-quarter results, we are revising our guidance for service charge income slightly to a low to mid single digit growth rate in 2008.

Not surprisingly, first quarter 2008 mortgage income was down 8.1% from the first quarter of 2007. However, it increased 27.8% from the fourth quarter of 2007, as we benefited from a higher level of refinancing activity in the quarter just ended. While we gave no specific guidance for mortgage income in 2008, our first-quarter results were somewhat better than we had projected internally.

Trust income continued to be a very positive line item for us as it increased 29.9% in the first quarter of this year compared to the first quarter of 2007, although it decreased 8.6% from the quarterly record set in the fourth quarter of 2007. At this point, we will stick with our earlier guidance for trust income growth in 2008 to range in the low teens to the mid teens in percentage terms.

Non-interest expense increased 6.1% in the most recent quarter, compared to the first quarter of 2007, and increased 3.0% compared to the fourth quarter of 2007. Our previous guidance suggested that this category of expense will grow in the mid single digits in percentage terms in 2008. Our first-quarter non-interest expense was moderately higher than we expected. Accordingly, we are revising our expectations and guidance somewhat to suggest that this category of expense will grow in the mid to high single digits in 2008.

Our expectation for growth of non-interest expense in 2008 reflects in part our plans to open only three new banking offices this year. During the first quarter, we opened a Dallas area banking offices in Louisville, Texas. This gives us four Dallas-area banking offices and a total of six Texas banking offices. During 2007, our Texas offices contributed the vast majority of our growth in loans and leases, and we expect that to continue to be the case in 2008.

Specifically, loans from our Texas offices accounted for 22.0% of our total loans and leases at the end of the most recent quarter, up from 16.9% at year-end 2007 and 10.1% at March 31, 2007. With our recently expanded retail banking presence in the Dallas area, we expect our Dallas area offices to also contribute more significantly to 2008 deposit growth. Our Texas offices accounted for 8.5% of our deposits at March 31, 2008, up from 6.5% at year-end 2007 and 4.4% at March 31, 2007.

Another of our key goals for 2008 is to maintain good asset quality. Economic conditions nationally have weakened significantly in recent quarters. While our markets in Arkansas, Texas at North Carolina appear to be less significantly impacted by this weakness that some other markets, we are obviously not immune to the effects of slower economic conditions and particularly the slowdown in housing activity. As a result of our ratios of nonperforming loans and leases, nonperforming assets, past-due loans and leases, and net charge-offs were all higher in the first quarter. While these measures are all elevated compared to our experience in recent years, they are not outside of the range we have experienced in similar credit cycles in the past. Our ratios still compare very favorably with recent results for the industry as a whole.

We had expected our ratios of nonperforming loans and leases, nonperforming assets and past-due loans and leases to increase in 2008, but the increase in such ratios in the first quarter was a bit more than we had expected. These first-quarter increases are not due to a specific customer or a specific market, but are a result of a number of credits spread across most of our footprint.

Our credit practices dictate that, the larger the loan, the more stringent are the credit standards applied. As one would expect, softening economic conditions therefore typically affect our smaller credits more adversely than our larger credits, as these smaller credits are not underwritten to the more rigorous standards applied progressively to credits of larger size. That is exactly what we've seen in recent months as smaller consumer loans, business loans and real estate loans to various customers have been adversely impacted by deteriorating economic conditions.

The increase in our ratio of nonperforming loans and leases is also due in part to a number of smaller, less well-capitalized builders for whom we financed a small number of home construction loans, typically ranging from one to five homes.

During the first quarter of 2008, we have been very aggressive in conducting thorough impairment analyses on all non-accrual loans and leases. The majority of the anticipated loss exposure from nonperforming loans and leases was written off in the first quarter, which led to a higher net charge-off ratio for the quarter. Accordingly, we feel that our nonperforming loans and leases at March 31, 2008 will not significantly impact future net charge-offs or operating results since such assets have been thoroughly evaluated and the majority of the expected losses have already been recognized.

Over the last five years and ten years, our net charge-offs ratios have averaged 27% and 34%, respectively, of the net charge-offs ratios for all FDIC-insured institutions as a group. We believe that our asset quality will continue to compare favorably to the industry as a whole. Accordingly, we expect that, in 2008, we will enjoy a favorable net charge-off ratio compared to the industry average.

In our January conference call, I stated our expectation that our net charge-off ratio for 2008 would be in the 18 to 25 basis point range. With a first-quarter net charge-offs ratio of 38 basis points, we would have to average approximately 20 basis points of annualized net charge-offs for the remainder of the year to hit the top end of that earlier guidance range. While we continue to believe that is a possibility, in light of the uncertainty about economic conditions and the higher-than-expected level of our first-quarter net charge-offs ratio, it seems prudent to revise our guidance for our charge-off ratio to a mid-20s to a low 30s basis point range for the full year of 2008.

In closing, let me repeat our statement that our paramount goal for 2008 is to once again return to a record quarterly earnings base. Building on the significant growth in earning assets in the first quarter and the improvement in our net interest margin in the first quarter, I believe we are well positioned to accomplish this goal in the coming quarters.

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

(OPERATOR INSTRUCTIONS). Barry McCarver.

Good morning, George. Great quarter.

Thank you, Barry. How are you doing?

I'm doing great. Part of that is thanks to you.

A bunch of questions -- let me just get a few and then I will let somebody else get on.

Starting off with margin, I did see where the rate you're paying on deposits dropped pretty dramatically. Can you talk a little about what's driving that? It certainly sounds like it's an easing up of competition there.

Well, certainly we are working hard on that and we are being very attentive, Barry, to seek deposits in the most cost-effective manner, which is leading us to be more active in certain types of deposits in certain markets and less active in other markets where competition continues to pay a very higher rate. So we were pleased, to some degree, with our success in lowering deposit rates in the first quarter.

But I will be honest with you. We did not achieve as much success as we had hoped to in lowering rates. Deposit rates continue to be more sticky than I think they should be as a result of fundamental economic conditions. I think part of that is just the result of the fact that liquidity markets of all sorts nationally are gummed up and I think that is creating a higher demand for deposits in keeping rates somewhat sticky and somewhat higher.

What helped us really offset the stickiness in that deposit cost was two things. One, I've already addressed the normalization of credit pricing. On new loans we are originating, we're probably getting 100 basis points and in many cases a lot more than that, better rate -- and by rate, I mean relative rate, not absolute rate -- than we would have gotten on those loans 6 months or 12 months or 18 months ago.

Secondly, while 53.8% of our loan portfolio is variable-rate, we started several years ago really trying to get floor rates in a lot of those loans, anticipating that if we got in the situation where the Fed was reducing rates again, that we might find deposit costs to be somewhat more sticky than normal. As a result of that, at the end of the first quarter, 49% of that 53%, almost half of our variable rate loans were at their floor rates.

So the combination of floor rates on our variable-rate loans and normalization of credit terms have helped us mitigate the impact of the stickiness on deposit cost and led in part to that improvement in the net interest margin in the first quarter. As I mentioned, about half that 22 basis point improvement -- in fact, exactly half of it -- was a result of just kind of fundamental improvements in our relative pricing of assets and liabilities, and half of it was due to the unusually good spreads that we picked up on the addition of those tax-exempt securities.

Now, you mentioned on those securities that there may be a portion that comes off in the second quarter. Are you thinking a third, half, or what do you mean by a portion?

Barry, it is difficult to know. We are getting large numbers of call notices on those securities. I would guess that we already have indications of call notices that are either issued or coming on probably 20% to 25% of those securities. You know, that's right now, and we're just getting started in the quarter. So we are expecting that a lot of those securities will be refinanced or paid off during the quarter.

Well, I guess what I'm trying to get at here, George, if that's the case and those securities did give the benefit to some at the margin, if they roll off and you don't see the cut in rate of deposits like you did this quarter, is there a potential to give some of those margin gain back in the second quarter?

Barry, that is certainly a potential. I'm not sure that is the likelihood, but there is certainly a potential. That's why, in our prepared remarks, we talked about the fact that of that 22 basis point margin gain compared to Q4 of '07, 11 of it was sort of normal from just improvement in the relative mix of things, and 11 of that 22 basis points was from this securities addition.

So if we give back some of that top 11, the question is will we be able to make that up by further improvement in the normalized deals? With the rapidity of Fed movements and the uncertainty about future Fed action and all of the turbulence in all of these markets, that is difficult to give you real precise guidance. So I will just tell you those are all the sort of things we're looking at.

We continue to believe -- we said in our January call that we expected to maintain or be able to improve our margin in each quarter of 2008 from the 347 level of the fourth quarter of last year. Certainly, that looks like very good guidance at this point, and we certainly stand by that guidance.

You know, our hope is that we will be able to maintain the margin at or close to the level of the first quarter and hopefully build on it as the year goes on. But I'm not giving you that guidance because there's just a lot of unusual moving parts in the liquidity aspects of our economy out there and competitive situations, but we are very encouraged by what we see as a massive normalization of credit terms and loan pricing. You know, in fact, I would say we've probably gone beyond normal and have even better than normal credit term environment and better than normal loan pricing environment because we've the pendulum has swung from a very aggressive environment in both respects to what looks like a much more conservative environment in both respects. So I think, as I said in my prepared remarks, that has some favorable implications for our ability to grow loans and our asset quality going forward and our margin going forward.

Okay, that's very good information. I guess the last line of questioning, moving over to loan growth, particularly strong growth in 1Q. Can you give us a little color on where those loans came from and what type of loans they are, that nature?

Yes. Most of those loans came, as I've already said, from our Texas offices and most of that came from our Real Estate Specialties group, which is our Metro Dallas office there, or down in the Preston Center area of Dallas. The Real Estate Specialties group handles our larger commercial credits. Most of these were construction and development loans, but the two largest credits I think we closed in the quarter had 45% approximate cash equity from the borrower in them, so we were loaning about 55% of the capital structure on the deal. These were ongoing projects that have sales histories. We can look at the trends of where sales have been going in recent years and recent quarters and where prices have been going in recent years and recent quarters. They are excellent projects.

So, we are seeing opportunities because of the liquidity issues in large segments of the market and the fact that a lot of financing vehicles are gone. We are seeing opportunities to do credits for really high-quality borrowers on high-quality projects with large amounts of cash equity in them at what, by standards of recent years, is very favorable pricing. So we think that, while the economic challenges certainly -- the economy is certainly providing challenges for everybody, that it's also creating some excellent opportunities and we were fortunate to be able to take advantage of some of those opportunities in the first quarter.

George, is one of the large deals you mentioned there -- is that the one you talked about on our field trip that was in Nevada, I believe?

Actually, we did a deal in California that's right across the line from Nevada. The other transactions were all done for our Texas-based borrowers but all done out of that office.

Yes. Did that deal -- was that fully funded in the quarter?

Not fully, but substantially.

Okay. So if there's a couple of big deals in the quarter, how much of the growth came from just those two big deals? I'm just trying to get an idea of the run rate for the second quarter that you can see.

I would say somewhere between 40% and 50% of the growth came from a couple of larger transactions. I think that's a pretty good estimate but I haven't calculated that specifically.

Okay, George, thanks a lot. I'm going to let somebody else ask some questions.

Charlie Ernst.

Good morning, guys. Can you just clarify again your thoughts as to sort of where the investment balances stabilize? I mean, I know it's kind of a guess at this point, but the period-end numbers were so much higher than the average that there's a lot of room there.

Charlie, I know there is a lot of room there, and I'm certainly not trying to be evasive, but the answer to your question is no, I can't say any more than I've said because I don't know any more than I've said. You know, we had a bunch of growth in the first quarter; we feel good about that. We've already had a number of call notices on a lot of those; a lot more will be called. We are, at the same time, looking for new opportunities. As you know, the markets are very dysfunctional in some respects right now, and you can find opportunities to buy things that are high-quality assets from high-quality issuers at either very low prices or very high rates relative to where those things would have been priced in the past. So we're looking for those opportunities, but we also know a lot of stuff we bought is going to be called. So I really can't tell you where we're going to be at the end of the quarter.

Right, okay. Were a lot of those new issues that are now getting called because rates have improved or --?

I'm sorry, I'm not sure I understand (multiple speakers).

Well, a lot of the (inaudible) that you are saying are getting called, where those new issues that you bought?

No, they were bought in the secondary market.

Okay. Then can you say what the margin was in March?

Charlie, I don't have that number with me.

It was 391.

391. You know, -- Paul has the number. It's 391. That margin was, I will tell you though, disproportionately affected by the addition of those tax-exempt securities, which we just really started adding them in the last part of February. So they were in there really only in the month of March in any significant volume. So the March number, given the fact that we expect a lot of those to be called, the March number may not be a good number for you to use for your run-rate going forward.

Okay. Then George, can you just talk about the drop-off in service charges? I guess, given that earnings credit rates have come down obviously a fair amount, I was a little surprised -- and we have an extra day -- I was a little surprised to see that number come down so much.

It was a little light for our comparisons. We expected that, instead of being up from the comparable quarter a year ago, 1% and change, we had expected that to be up more in the 4% to 5%, 6% sort of range. So you know, those numbers tend to bounce around a bit, so I'm not going to read too much into one quarter's results, but the fact that we were a little surprised by the run-rate on that, compared to the first quarter of '07, did lead me to slightly adjust our guidance from my mid teens guidance to a low to mid teen guidance, because we were a little surprised by it. Low to mid single digits, excuse me, I'm sorry.

Great. So there wasn't any one particular component that you felt was more disappointing than the rest?

No, no.

Okay. Then the other expense line looks like it was up a fair amount in the quarter. Can you add some color there?

Not really any more than I've added. You know, there were lots of pieces of that with our mortgage volume being up a little more than we had expected; most of our originators there are based on incentive comp. Some of our incentives for some of our lenders were a little higher than we expected because of growth in volume and improvement in spread on new product that they were originating. So you know, there were things like that that contribute to it, but there's not any one big thing; it was a bunch of little things.

Okay, then I'm guessing the tax rate is just going to kind of float around inversely with what you are doing with your mortgage-backeds?

Well, tax-exempt.

Yes, I'm sorry, your [munis].

Yes, exactly.

Okay, thanks a lot you guys.

Andy Stapp.

Good morning. Nice quarter. I'm missed the upper end of the guidance range you gave for net charge-offs. Could you repeat that, please?

Yes, I can. What we said was a mid-20s to low 30s basis point range for the full year of 2008. That guidance takes into account the 38 BIPs in Q1.

Okay. How much did construction development loans account for total loans at quarter end?

Construction and development accounted for 39.5% of total loans at the end of the first quarter.

Okay. Would you happen to have the average loan-to-value of construction development loans?

No, I don't have that number. I would again tell you that the growth that we originated in that category in Q1 was principally, volume-wise, was in credits that had 35% to 45% cash equity or subordinated equity debt in them.

Okay. Do you happen to have how much of construction and development loans were housing-related?

Andy, I'm sorry, I don't have that information. We have it; I just don't have it with me.

All right. All of the other questions I had have been asked, so thank you.

Chris Chouinard.

Good morning. I had a couple of quick questions on the securities portfolio. First, on the tax-exempt portfolio, and I apologize if this was in the release somewhere, but I saw the average balance in the quarter was $229 million, but it sounds like the growth was really back-end loaded. What was the balance of this tax-exempt portfolio at March 31?

Chris, we will get you that number while we are on the call here. I've got the whole portfolio but I'm going to have to break down, so Paul, if you could get that. You are correct in your assumption that it was back-end loaded principally in the month of March.

Okay. The second question was just, you know, your yield on taxable securities also went up linked-quarter, despite the fall in short-term rates. Did you guys go longer duration in the quarter or was there something that pushed up that yield? Because that was up about 40 basis points linked (multiple speakers)?

Chris, there were a couple of things that sort of shifted the composition of that and affected the yield of that a little bit. One was very early in the quarter, and I don't remember the exact numbers, but we had $30 million or so of callable agency securities that were among our lower-yielding securities in the taxable part of the portfolio called away. Frankly, I wasn't disappointed to see those called away; we were sort of glad to lose those.

So the securities portfolio actually started out -- if you had asked me for guidance on the securities portfolio at the end of January and I had the liberty to address that subject with you, I would have told you our securities portfolio was going to be down from the quarter because of those securities getting called away. Obviously, that changed in late February and March as we bought a bunch of tax-exempts.

The second thing that affected the yield on the taxable part of the portfolio is we do have a bunch of mortgage-backeds in there. These are AAA rated, A paper mortgage-backed securities, guaranteed issued by Fannie Mae and Freddie Mac, so they are high-quality mortgage-backeds. But we own those with substantial discounts in them, and I say substantial discounts; I will give you the number. At the end of the quarter, our discount on those securities was $8.857 million versus premiums on a few of those securities of $160,000, so about a $8.7 million net discount on those securities. There was a little refi boom for a short period of time there in Q1 that increased refinance activity and resulted in a little bit of an accelerated rate in the recognition of the discount accretion on those securities. So, that contributed a bit to the yield on those.

Okay.

The volume of total tax-exempt municipal obligations at the end of the quarter was 386 -- I'm sorry, $388.8 million, total tax-exempt, $388.8 million.

I got it, that's helpful. Just the last thing, was there a drag at all from the increase in nonperformers on net interest margin this quarter, or was that not noticeable?

There was some drag on it, yes, obviously, when we were I think pretty aggressive in putting loans on nonaccrual status and when you do that, you of course write-off previously accrued interest on them as well as ceasing to accrue interest going forward. So yes, there was an element of drag from that.

Okay, great. Thank you.

Dave Bishop.

Good morning, George. In terms of the loan-loss provisioning for this quarter, maybe walk us through that. Is that more attributable (inaudible) what you saw in terms of the non-accrual inflow, or is that sort of just positioning for maybe what you're seeing in terms of just macro, overall macro deterioration?

Well, the non-accrual loans and leases contributed to the amount of our provision really to the extent of the net charge-offs that you saw. As I said in my prepared remarks, we were very diligent in doing an impairment analysis on almost every non-accrual loan and lease at the end of the quarter. There were a few small ones that come late in the quarter that you don't have time to do your impairment analysis, and there are a handful of hand consumer -- I mean like less than 10 consumer type loans that are in bankruptcy that the indications are that the bankruptcy plan will require -- provide for full repayment to us, so we didn't do an impairment analysis on those. But probably 97%, 95%, 98%, somewhere in that upper 90% range of the loans that were on nonaccrual status at the end of the quarter, we did a thorough impairment analysis in accordance with FAS 114. Those loans were written down to the estimated net recoverable value during the quarter.

So as I said in my prepared remarks, we expect little additional charge-offs to come from the loans that are on nonaccrual at March 31. But we obviously did have a higher level of charge-offs in the quarter as a result of those. Certainly, we put enough in the reserve to cover the charge-offs plus about $1.5 million of reserve building in the quarter. That reserve building is principally a result of two things. One is the fact that we had very favorable loan growth in the first quarter, so because of the loan growth, we added a chunk to the allowance. The modest additional over-and-above charge-offs and the addition of (inaudible) lines for growth is a reflection of macroeconomic conditions.

I got you. Then maybe -- I know there's a lot of teeth-gnashing in angst about the Northwest Arkansas area there. Any sort of update on what you're seeing there in terms of the housing market?

You know, that market continues to be challenging. It's a strange thing in that, as markets in Arkansas go, that two-county area probably still has the best job and population growth metrics of the entire state of Arkansas, so you've got a very favorable economic environment that is obviously just seriously overbuilt. We added a few more nonaccrual assets in that market in the quarter. It was not a disproportionately large contributor to our nonperforming assets, but we added a few. We were fortunate, at the same time, to liquidate a few up there. So it continues to be a challenge.

With the continued employment growth and population growth, assuming that does continue -- and it seems plausible to believe it will -- we will get to the point where that market will be at an equilibrium supply again. But it is proving to be a very challenging market and I think the correction up there is lasting longer than most of us expected it would.

When you do move to liquidate the loans you have foreclosed upon up there, what sort of discounts are you seeing there, relative to what you've written them down to? Are you realizing what -- the realizable value you put them on the balance sheet for?

Well, we went through all of our nonperforming assets up there in the first quarter and actually took additional write-downs on them that I think were about $110,000, $120,000. That went through noninterest expense as amortization of other real estate. Our goal in doing that revaluation is I told my guys, I said, you know, we are entering the spring selling season. Typically, things in Arkansas sell well from about May through the summer, and that's your best selling season, typically. I told our guys that what I wanted to do is thoroughly evaluate every OREO asset we have up there based on the most recent market comps and I wanted to write it down and lower our asking price to an asking price that is designed to result in a sale of the property in the next six months, in the second and third-quarter selling season. So when we did that, we were determined that we were probably higher than we needed to be on about a half-dozen assets or eight or so assets but there, single-family homes and lots, typically. We wrote those down accordingly. So we, think that the revaluation of those assets in Q1 gets us pretty much there on the assets in that market. Now, that assumes that the recent comps they were using to establish sales prices continue to hold up. We've seen quite a bit of retrenchment in pricing of assets up there over the last year.

I think the current market values ought to pretty much hold but if they slip further, then we will have to take another valuation adjustment on those assets to liquidate them. But we think, at this point, we're pretty close to where we need to be. We're certainly trying to be there. What we did is took our expected sales price, discounted it 5%, and then discounted that number further 7% for closing costs is sort of the methodology we used, so I think closing costs and commission. So I think we've been pretty reasonable in what we have done there.

Thanks for the color, George.

Brian Martin.

Say, just a quick question, a couple here. The nonperformings in the quarter, the increase -- was there any concentration by category as far as were there development loans, or C&I commercial real estate? I know you said that it seemed like it was --?

No, there really was not. As I said in my prepared remarks, it wasn't a single market, it wasn't a single customer. It was principally spread across that sort of bottom echelon of your more marginal credits at the bottom of your portfolio. Everybody's portfolio has a bottom edge and a top edge, and this was stuff that was knocked off the bottom edge of the portfolio, typically smaller credits.

If there was anything that you would parse out of that and say, oh, well, that was more prominent than any other -- and I addressed this again in my remarks -- we had a number of small builders, guys for whom we build typically or finance typically one to five homes that just ran out of gas. You know, the pressure on house pricing has cut the margins for those guys, and home sales were definitely slower in the fourth quarter and the first quarter. That's due to, in part, seasonal factors here. The fourth quarter and first quarter are typically slower times, aggravated by macroeconomic conditions nationally and kind of bad press and psychology nationally for house sales. Some of these guys facing lower profit margins on their house sales and a few contracts falling out on various deals and longer holding periods, the interest rate carry just ate up their liquidity and they reached a point that they couldn't continue. So we've seen a handful of those small builders blow up in the first quarter. But you know, they were also consumer loans, there were car loans and various enterprises of various kinds and a variety of consumer loans. So while I pick on the small, less well-capitalized homebuilders in my remarks there, it was not solely in that category.

How about just the last question, your loan exposure up in northwest Arkansas, you know, have you given that or can you give a little -- I guess how big that portfolio is up in those markets?

I can give that. I'd don't have that handy but --

I can wait, if you guys get it before the end of the call. Just, you know the other two things -- if you can -- you know, a lot of the growth you talk about coming out of the Texas franchise, this real estate group, some of that being out-of-state lending, can you give some color as far as what percentage of the loan book is out-of-state lending at this point?

Well, are you -- let me answer your question -- our Washington and Benton County offices -- let's say March, okay -- have total loans of about $140 million, $147 million. I could be off $1 million or so, but I'm adding up a column of numbers in my head here, but about $147 million.

Okay.

You know, I'm not sure necessarily what you mean by out-of-state. I don't know if you're calling Texas out-of-state.

No, I guess what I'm saying is, you know, the loans you're doing with the Texas borrowers that are working on projects out of -- in Nevada and California, that type of --

Well, I actually don't have any in Nevada. We've got the one in California that Barry mentioned. It's across the line from Nevada, so I don't think we have any assets in Nevada.

You know, we have assets in other states for our builders in Texas. A lot of the developers in Texas, a lot of the guys that we do business with in Texas are -- perform at a regional or national level. They develop projects regionally and nationally. Some of those guys are among the top ten or so in their field; they are very good at what they do. So we do have some assets in other states. We just looked at our loan concentration report, and no other state accounted for a significant part of that, but we do have some deals in South Carolina. Part of that is because we do business in South Carolina out of our Charlotte office that's just north of the South Carolina state line. Part of that's because a large shopping center developer that we do business with has a shopping center in South Carolina not too far from Charlotte. So we have some business there.

We've got some business in Louisiana because of Texas developers that do business in Louisiana. And we are in other states. But there's not a concentration of that, and it's principally with people that we know and do business with.

Okay, how about just the last two things -- the nonperformings, can you give some color as far as the breakdown between Arkansas and Texas on those nonperformings? Is it proportional (multiple speakers)?

Probably pretty close, yes, I would guess it is. I haven't looked at that actually to break it down proportionally, but I would say that it is probably pretty much proportional. Our nonperformers in Texas consist of I think two or three residential construction loans for small builders. They were not originated by Real Estate Specialties group, which handles are large credits. They were originated at the retail level by our Frisco, Texas banking office, so not anything unusual there, and the same would be true for North Carolina, pretty much in proportion to our assets there.

Okay. Just lastly, given the future growth, it looks like, from your perspective in Texas, can you just talk a little bit about how that market is currently versus maybe where it was a year ago? Kind of I guess economically and competitively as you look at it now, has there been any significant change with kind of the macro slowdown?

Yes, there has been. The economy there continues to be very good. I was traveling the other day to a banking conference which I spoke, and as I was going through the airport, I was watching the TV while I was waiting for the plane. One of the reports on the news was that, of the 10 fastest-growing cities in the United States, four of them were in Texas. I think Charlotte was one of the others. So, we feel like we are in pretty good places.

I was told the other day -- I haven't independently verified this number -- that that 12-county Dallas-Fort Worth area Metroplex created 88,000 new jobs last year, and that was up from 70,000-something in 2006 and down from almost 100,000, 90,000-something in 2005. So the economy in Texas, at least in the metropolitan markets in which we're doing most of our business, seems to be very favorable and at sort of top of the heat or certainly in that top echelon among economies nationally.

We are finding that, for the larger commercial real estate credits that we do, that there's been a significant fallout from a lot of guys that were very aggressive originators in recent years that have had problems and have thus exited the market. Of course, a lot of the secondary sort of market financing vehicles for things have totally gone away. So, we are finding that the way we do business, the type of customers we do business with, that there's less competition than there was, and that has led to, as I described earlier, the normalization of pricing and credit terms that we think is very favorable.

So, we certainly realize that we are in a challenging macroeconomic environment and a challenging portion of the credit cycle, but we are seeing lots of opportunities that look very compelling. We think it's time to deal with the challenges on the one hand and try to capture good opportunities on the other.

Thank you very much for the color.

Peyton Green.

Yes, George, I was wondering if you can give a little bit of color just in terms of the payoffs that you received in the quarter. Are you still seeing a fair amount of payoff volume or are you starting to see more inventory-type loans with respect to real estate deals, where maybe projects don't get completely sold out?

Peyton, we did see a good stream of payoffs in the quarter. Some of them we were glad to see, and some of them we were not glad to see. - You know, we got paid off on a few things I wish we had gotten paid off on, but we had a good-enough volume of new stuff in the pipeline that it mitigated that.

So I think your question is probably are we seeing lots sales and commercial projects. Our home sales get gummed up for lack of sales velocity that would be a problem. That would lead our balances and our loan portfolio to grow but not the type of stuff you want. The answer to that is, other than a small number of the smaller home builders, we are not seeing that. The commercial stuff seems to be moving through the pipe very well and in a very orderly fashion. Of course, particularly the larger stuff that I'm looking at day to day there has typically got a lot of preleasing or pre sales activity and very substantial borrowers behind that. So we are not seeing any problem there.

The issue, I would say, is with the smaller home builders who just are having trouble adjusting their finances to a lower-margin, slower sales velocity market. Our large home builders that we finance seem to be doing very well and that. I say large; we don't finance the guys like Lennar and KB and Horton, you know, the super-big guys. But kind of the middle-sized guys that we finance there seem to be continuing to generate good sales velocity and good profit margins. It's the smaller guys that are not quite as well-run and didn't start off with as good a profit margin or as good marketing plans in the first place that seem to be adversely affected. You pretty much see the results of that in our Q1 nonperformers.

Okay. Then with respect to balancing the challenges and the opportunities, how long do you think the pendulum stays kind of swung in your favor in terms of really clinically being able to look at new opportunities and take advantage of them while others are somewhat shell shocked? Do you think it lasts throughout this year, or from your historical perspective, what do you think is most appropriate to kind of view it?

You know, Peyton, I've been doing this job 29 years and I'm not sure that 29 years of historical perspective qualifies me to answer that question there. We are certainly in unusual market conditions, and we are in unusual market conditions following a period a very unusual market conditions.

You know, we got to a point -- and you heard me complain about this in roadshows and investor meetings for several years -- where it just seemed like so many of our competitors were ignoring interest-rate risk and ignoring credit risk and just getting so hyper-aggressive and marking for such thin margins that, in many cases, it made no sense to us and cost of a lot of volume. While we tried to be somewhat aggressive with them, there were always people out there that were a lot more aggressive than we were, both on pricing and credit terms. So we found that -- I think that was an unusual environment. I hope we don't ever return to that as a norm in the future.

The pendulum, as I suggested in my earlier remarks, has probably swung past normal to conservative underwriting standards. You know, we are looking at a deal now, an opportunity for a customer that the customer approached us and is proposing what would be about a 60% cash equity with about a 40% loan in the transaction. You know, that's not something that you would see in normal times. Deals with 45% and 50%, 60% cash equity -- those are not deals that would normally happen.

So we've swung, in a lot of transactions, to the other extreme. I think that's a great opportunity to really book some high-quality business. Whether we are in that sort of environment another quarter or another year is going to depend on macroeconomic conditions and you are in a better position to gauge that than I am.

Okay. Then with respect to the loan-to-earning asset mix, I mean, historically, I guess on an end-of-period business, you all used to run at kind of a 70% level very consistently, and it got up to about 76% in the fourth quarter and back down to around 71% at the end of the first quarter of '08. I mean, do you think, with bond yields or the spread that's back in bond yields, do you stay closer to what you've done historically, or do you think it was just a very short-term opportunity to take advantage of the market's disruption?

Peyton, you know, that's asking Charlie Ernst's question in another way. The answer is I just don't know. A lot of that will depend on how many of these municipal securities get called and refinanced and what else we find in the way of opportunities, and I just don't know. I can't give you any guidance that's going to help you. You're just going to have to take the same middle of the road sort of guess on that that Paul Moore is taking here when he updates my plan and projection month-to-month. He is asking the same question; I'm saying "Paul, I wish I knew the answer." I can pretty much tell you what it's going to look like next week, but three months out is a little harder.

So you know, we will just see what the market gives us. If the market does us great opportunities that are just slam dunks, we are going to try to take them. If not, you'll see that portfolio drift back down.

Okay. Then last question -- do you think there are going to be any more M&A opportunities? I know you all have very tight criteria in how you look deals, but do you think the environment is moving more that way where an M&A opportunity might be more of a possibility that it has been?

You know, certainly there are going to be banks and our banks out there that are experiencing a lot of discomfort and stress that would probably love for somebody else to deal with all of that discomfort and stress for them. So there are going to be some more motivated sellers than there have been at the past, and there may even be some failed bank opportunities that might provide a chance to pick up some deposit bases or something.

So yes, I think there are more opportunities. The countervailing factor there -- and you know this -- is that, with bank stock multiples down as a multiple of book or multiple of earnings from where they have been, that your small, non-public companies who are -- might want to be sellers, and there are a lot of those potentially in Arkansas because it's still a very fragmented banking market. Those guys probably have not adjusted their expectations about sales multiples as much as the market has adjusted the trading multiples of publicly traded companies. So you know, there's going to -- apart from the highly motivated sellers who are feeling a lot of stress and are ready to get out of it and seek some safe haven, there may be more disconnect than there's even been in the past between sellers' expectations of value and buyers' ability to deliver that expectation. So I don't know that we are entering into a fundamentally favorable M&A environment. My guess is it's limited to transactions that are under some level of stress and duress. You may be seeing that. I was reading something while I was traveling the other day. I think it was an American banker that said eight or nine acquisition deals have already unraveled so far this year, and it may be a tough market in which to do a lot of M&A.

Okay, good enough. Thank you.

Dave Bishop.

Just one more question I'll try to throw out there. Loans 30 to 89 days past due, I didn't know if you could provide that number at this standpoint?

Loans 30 to 89 days past due?

Yes.

No, I don't have that. The number I can give you is loans 30 or more days past due. That was 130 basis points at the end of the quarter, and that includes nonperforming loans that are past due. Not all of my nonperformers are past due. We've put some loans on nonperforming status even though they are technically current, but most of the nonperformers are past due. So if you take that 130 basis point total past due ratio and subtract out the nonperformers, that would --

(multiple speakers)

That would give you some information. It would not necessarily be particularly a proxy for loans less than 90 days past due because some of the nonperformers were less than 90 days past due.

We put a loan on nonaccrual status -- I will tell you this -- as soon as we believe there's serious doubt as to the collectibility of interest, so a lot of times, they are on nonaccrual status before they ever hit the 30-day list. Nothing over 90 days is on accrual status. If it's over 90 days, by policy -- and our system is hardwired -- it puts it on nonaccrual, even if we don't, at 90 days past due.

Do we have any other questions?

Barry McCarver.

Just a couple of quick follow-ups -- number one, in the fourth quarter, you had an issue with a particular lender who I believe is no longer with the Bank. Are any of the nonperformers or charge-offs in Q1 related to that issue? I'm just trying to get a sense of where we are at there.

Yes. You know, we said, in the fourth quarter conference call, that we had, in addition to the charges we took in Q4, that we had reserved an extra $265,000 for potential charge-offs from that portfolio that we had estimated but had really not had a chance to do a thorough evaluation or impairment analysis on those assets. We, of course, did all of that in Q1, and I don't have the exact numbers but when we finally got through doing the impairment analysis and evaluations on the credits we had not had time to thoroughly evaluate, that $265,000 lost number was low. It was 400?

(inaudible)

Yes. Paul is telling me that our total charge-offs from that portfolio in Q1 were north of $400,000, somewhat. So we missed that by $150,000 or so on that. All of that has been addressed, so his portfolio was, again, a fairly significant contribution to the Q1 charge-offs. We've been through everything there, have filed our bond claim with our bonding company on that and are waiting to hear back from those guys; they've had it several weeks now. I think that will be a protracted process working through that with those guys.

But that issue is I think, behind us, in the extent that everything has been evaluated, all of the charge-offs have been taken as of Q1, everything that I think is going to be a nonperformer there is a nonperformer. We actually started selling and sold several of the assets from that in the first quarter. But as I said in the December conference call, we think it will take us about three quarters probably to totally sort of liquidate the various problems from his portfolio. Quite a few of those now we've started the foreclosure process, and they are working through the normal legal hoops that those things work through that takes a quarter or two.

So, to make sure I understand, any of the increase in nonperformers over 4Q, was any of that related to the guy?

Probably to the extent that there was an increase in nonperformers from the portfolio, it was more than offset by the charge-offs. So actually, if you're looking at Q4 nonperformers and March 31 nonperformers related to his portfolio, they are probably actually down. I didn't actually run that number but our charge-offs probably exceeded any smaller additional things that we found that we added to the nonperformers. Then we did sell several of the properties there that also started whittling away. So, I'm pretty confident in saying that the level of nonperformers related to his portfolio were probably down slightly from December 31 to March 31, as I think through that.

Okay. Then just lastly, in terms of the long-loss provision, I know you've touched on this quite a bit already. But if we are assuming a little bit higher production levels in loans for '08 versus the last several quarters -- and I'm certainly not suggesting the level that we saw in 1Q necessarily -- but if NPAs are going to be a little bit elevated and a little bit higher loan production, is it safe to assume that you may push that reserve ratio up a little bit higher?

That is really all going to depend on what our formulas dictate internally. The higher reserve at the end of March included our formula calculations plus an unallocated percentage of 22% and change. You know, typically we evaluate the various factors that would justify the unallocated percentage quarterly. Our most recent determination in that regard is that, based on softer macroeconomic factors and concentrations of credit and all other factors that we look at in that, that we think an unallocated percentage of 15% to 25% is appropriate. So we are in the upper half of that range and that actually is a little higher unallocated than we've had in the last several quarters. That's a reflection of a slightly softer or moderately softer macroeconomic environment nationally.

Okay, thanks a lot, George.

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Michelle, do you have any other questions?

There are no further questions at this time.

There being no further questions, let me thank you all for joining our call today and tell you we very much look forward to talking with you again in July. Thanks for tuning in. Bye-bye.

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