Bank Ozk (OZK) 2008 Q3 法說會逐字稿

Good morning. My name is [Kamecia] and I will be your conference operator today. At this time, I would like to welcome everyone to the Bank of the Ozarks third-quarter 2008 earnings release conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). 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 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; net income; net interest margin; net interest income, including our goal of achieving record net interest income in the final quarter of 2008 and into 2009; non-interest income, including service charge, mortgage lending, and trust income; non-interest expense; asset quality, including expectations for our net charge-off ratio and other asset quality ratios; loan, lease, and deposit growth; and changes in the volume and yield of certain portions of our securities portfolio. You should understand 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 or 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. We are very pleased to be reporting our second consecutive quarter of record results for both net income and earnings per share. In the quarter just ended, we also achieved our seventh consecutive quarter of record net interest income, improved our net interest margin for the fourth consecutive quarter, once again achieved relatively good performance in asset quality, and added to our allowance for loan and lease losses. All things considered, we think we had an excellent third quarter.

It probably goes without saying, but it was another exciting quarter to be in the banking business. Despite all the dramatic volatility in the equity and credit markets, and the jaw-dropping headlines from Wall Street and Washington, in most respects, it was business as usual here at Bank of the Ozarks in the third quarter. However, it was a very busy quarter. We found ourselves constantly monitoring conditions in the economy, the credit markets, and throughout our industry, trying to detect any risk that might impact us, while also trying to identify opportunities created by this extraordinary environment. In addition, during the third quarter, we had our regular state bank department, Federal Deposit Insurance Corporation, and Federal Reserve regulatory exams. I would characterize all those exams as routine, but as always, they required a significant amount of management time and attention.

There were many important elements in accomplishing our record third-quarter results. So let's talk about some of those details. Net interest income is our largest source of revenue, accounting for approximately 83% of total revenue in the quarter just ended. In our conference calls this year, we have stated that one of our goals for 2008 was to achieve record net interest income in each quarter. In the quarter just ended, our net interest income increased 25.1% compared to the third quarter of 2007. And it was up 4.3% from the second quarter of this year. This gives us our seventh consecutive quarter of record net interest income.

We continue to believe that achieving record net interest income is a realistic goal for the final quarter of 2008, and that will continue to be one of our goals in 2009. To achieve this goal in the coming quarters, we will need to achieve good growth in earning assets, and maintain our net interest margin at or near the current level or, hopefully, improve it somewhat further.

In each quarter this year, we have benefited from meaningful improvement in our net interest margin. Our third-quarter net interest margin improved to 3.82%, up five basis points from the second quarter of this year.

In our last two calls, we have discussed that our first- and second-quarter results benefited from our increased level of investments in certain tax-exempt investment securities, and we said that we expected the benefits of these investments would go away as conditions in the credit markets normalized and yields on these securities returned to more normal levels, or as these securities were called away. As expected, our volume of these investments diminished in July and August, as many securities were called, and yields on other securities dropped below a yield that was beneficial to us. However, when credit market turmoil returned in September, we once again found many good opportunities to both increase our volume of these investments and our yields on them.

In our last call, we stated that we estimated that these securities investments added about three basis points to our second-quarter net interest margin. And we stated that we expected the yields on these securities to be lower in the third quarter. We therefore expected such securities to be dilutive to our third-quarter net interest margin in percentage terms while still being accretive to our third-quarter net interest income in dollar terms.

That's exactly what happened. We estimate that our investments in these securities reduced our third-quarter net interest margin by approximately three basis points, although they still provided a positive addition to net interest income in dollar terms.

Our volume of these securities has declined from approximately $290 million at March 31 of this year to $170 million at June 30, and $119 million as of September 30. If this portfolio continues to pay off as expected, our total securities portfolio will continue to shrink.

In the third quarter, our total investment portfolio declined approximately $47 million, which was roughly equivalent to our reduced volume of investments in these tax-exempt securities.

During the third quarter, we also benefited once again from further improvement in our spreads between loans, leases, and other securities, and our deposits and other funding sources. This is evident in the growth in our net interest margin from 3.77% in the second quarter, when we estimate that our net interest margin benefited approximately three basis points from favorable yields on the additional tax-exempt investment securities, to a net interest margin of 3.82% in the third quarter, when we estimate that our net interest margin was reduced approximately three basis points as a result of lower yields on the additional tax-exempt investment securities.

At this point, we believe it is reasonable to think that we will be able to achieve net interest margin for the remaining quarter of 2008 at a level approximately equal to or possibly somewhat above the 3.82% level achieved in the third quarter. This guidance assumes a slightly dilutive effect on our net interest margin in the fourth quarter from our continued temporary investments in tax-exempt investment securities.

Growth in earning assets, both loans and leases and investment securities, also contributed significantly to our record net interest income in the first three quarters of this year, although our average earning assets in the quarter just ended were slightly below the level of our average earning assets in this year's second quarter. This was due to the lower average balance of the previously discussed tax-exempt investment securities in the third quarter of this year as compared to the second quarter of this year.

Loans and leases at the end of the third quarter were up 13.2% compared to September 30, 2007. In the first three quarters of this year, our loans and leases grew 9.8%, or approximately 13.2% annualized. This is at the low end of our 2008 guidance range for loan and lease growth, which was for loans and leases to grow from the low teens to the high teens in percentage terms for the full year of 2008.

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 that we are still achieving loan and lease growth at this level this year. Of course, current economic and credit cycle conditions are making it harder in many respects to find good quality loans and leases. On the other hand, these conditions have led many competitors to withdraw from the market because of liquidity, asset quality, and other problems.

There are still many good quality loan opportunities. And the recent changes in the competitive landscape have given us opportunities to originate loans with significantly better credit terms and pricing than in recent years. After several years of having to compete against very aggressive pricing and credit terms, these signs of significantly improved credit terms and loan pricing are very welcome. And if they continue, they should have favorable implications for future loan growth asset quality and net interest margin.

Let me shift quickly to non-interest income. We've provided a great deal of detail on non-interest income numbers in our press release so I'm not going to repeat any of those numbers. Let me just give you a little color. First, income from certain -- deposit account service charges was up slightly compared to the third quarter of last year, and up nicely from the sub-par results of this year's second quarter, which we believe were negatively impacted by the economic stimulus checks distributed to most taxpayers.

Mortgage lending income for the third quarter was at its worst quarterly level since the third quarter of 2001. Obviously, this reflects the generally weak housing market conditions, including negative market psychology, the effects of slightly higher mortgage rates as credit spreads have widened, and the more rigorous underwriting and appraisal standards being applied throughout the mortgage industry. Overall, it's a tough mortgage environment.

Our trust staff continued to add new accounts and grow existing relationships during the third quarter as they have done all year. This has resulted in solid growth in trust income in each quarter of this year as compared to the comparable quarter of 2007. We continue to expect that trust income for the full year of 2008 will increase from the low teens to the midteens in percentage terms compared to 2007.

During the quarter just ended, we incurred net losses from sales of investment securities and other assets of $396,000. This was primarily attributable to the sale of our only two preferred stock investments, which were in Citigroup and JPMorgan. While we have confidence in the long-term prospects of these two companies, preferred stock in general was under considerable stress following the takeovers of Fannie Mae and Freddie Mac, and, accordingly, we decided to liquidate these investments. I would emphasize that we have no preferred stock investments after the sale of these two.

On a related matter, I will note that we have had no exposure to Fannie Mae or Freddie Mac common or preferred stock, and no credit exposure to Lehman Brothers, AIG, WaMu, or Wachovia. While everyone in our industry will likely experience some indirect impact from the recent turmoil on Wall Street and in Washington, we are fortunate to have avoided many pitfalls which have directly affected many other financial institutions.

Non-interest expense increased 17.8% in the third quarter of 2008 compared to the third quarter of last year. For the first nine months of this year, non-interest expense was up 12.3% compared to the first nine months of 2007. This was in line with our most recent guidance, which was that we expect non-interest expense for the full year of 2008 to be somewhere between 10% and 13% above non-interest expense for the full year of 2007.

Although our third-quarter efficiency ratio of 43.8% was higher than the record efficiency ratio we achieved in this year's second quarter, it still represented a good improvement compared to the 45.1% efficiency ratio achieved in last year's third quarter.

Another of our key goals is to maintain good asset quality. Economic conditions nationally have weakened in recent quarters, making our traditional strong focus on credit quality even more important. Most of our markets in Arkansas, Texas, and the Carolinas generally appear to have been less severely impacted by this economic weakness than many other markets. The notable exception is northwest Arkansas, which is still wrestling with a significant oversupply of residential and commercial lots and homes in certain price ranges in sub-markets. We've already worked through a number of challenges in this market over the past two years and we expect that we will have to work through some more challenges there until economic conditions improve, the excess supply is absorbed, and liquidity improves in that market.

During the quarter just ended, the trend of our various asset-quality ratios was mixed compared to our ratios for this year's second quarter. On the positive side, our ratio of nonperforming loans and leases to total loans and leases at September 30 was 70 basis points, which is four basis points better than such ratio at June 30. And our third-quarter annualized net charge-off ratio of 27 basis points was six basis points better than this year's second-quarter ratio.

On the negative side, our September 30 ratio of nonperforming assets to total assets was 66 basis points, which is seven basis points higher than such ratio at June 30, and our 30-day past-due ratio at September 30 was 94 basis points, which was two basis points higher than such ratio at June 30 of this year.

Given that all four of these ratios are only slightly changed from our second-quarter ratios, two are up and two are down compared to the second-quarter results, one might ask if we have reached an inflection point in regard to asset quality. Certainly, we have seen a slowdown in the rate of emergence of new asset quality problems in the last month or two. But the growing angst about economic conditions nationally in recent weeks suggest that it is premature to declare a turning point in asset quality at this time. While no one can say for sure, we will repeat what we have said for the past several quarters, that in the coming quarters we may see one or more, or even all, of our asset quality ratios increase somewhat further. But we think such increases, if they do occur, will not seriously affect our ability to generate a good level of net income, or even a record level of net income in each quarter.

In support of that statement, let me point out that the increases in our various asset-quality ratios and provision expense during the first three quarters of 2008 have not prevented us from posting good earnings in each quarter, including record earnings in the last two quarters.

Earlier this year, we provided guidance that we expected our net charge-off ratio for the full year of 2008 to be in a mid-20s to low 30s basis point range. Based on our annualized net charge-off ratios of 38 and 33 basis points, respectively, in the first and second quarters of this year, in our July conference call we stated it seemed likely that our net charge-offs for the full year of 2008 would be toward the top end of such guidance range. Our third-quarter annualized net charge-off ratio of 27 basis points brought our year-to-date results for the first nine months of 2008 to an annualized ratio of 33 basis points. We continue to believe that our net charge-off ratio for the full year of 2008 will be toward the top end of our earlier mid-20s to low 30s basis point range.

During the quarter just ended, we made a $3.4 million provision to our allowance for loan and lease losses. With net charge-offs of $1.4 million for the quarter, this resulted in a $2 million increase in our allowance for loan and lease losses in the third quarter.

For the first nine months of 2008, our provision to the allowance for loan and lease losses have totaled $10.7 million, and net charge-offs have totaled $4.9 million, resulting in a $5.9 million increase in our allowance for loan and lease losses so far this year. This growth increased our allowance to 1.24% of total loans and leases at September 30, 2008, compared to 1.05% of total loans and leases at December 31, 2007. We believe this 19 basis-point increase is appropriate, considering all relevant factors, including the continued uncertainty regarding economic conditions in general and market conditions in northwest Arkansas in particular.

In our last conference call, we provided extensive details regarding some of our practices for accounting for and structuring loans, practices which we consider to be very sound and conservative. We are not going to repeat all that again, but it is probably appropriate to summarize a few key points. First, we have been very aggressive in promptly conducting thorough impairment analyses on nonaccrual loans and leases, and regularly re-evaluating the carrying values of foreclosed and repossessed assets. Our general practice has been to quickly write off any identified loss exposure from nonperforming loans and leases, and foreclosed and repossessed assets.

During the quarter just ended, we continued our practice of aggressively re-evaluating the carrying values of foreclosed and repossessed assets, and we recorded approximately $228,000 of non-interest expense during the third quarter to write down the carrying value of foreclosed assets to reflect changes in market value. Accordingly, we feel that we have little or no loss exposure from our existing nonaccrual loans and leases, and foreclosed and repossessed assets, as of September 30.

Second, we have been very aggressive in placing loans and leases on nonaccrual status when we believe doubt exists regarding the ultimate collection of payments. Because of this conservative accounting practice, at September 30 we had some loans on nonaccrual status which were are still making payments, including some loans that were not past due.

Third, in regard to a couple of other subjects which were discussed in detail in our last conference call, I would just remind you that we consider our practices regarding interest reserves for construction and development loans and capitalization of interest on loans as very conservative. If you have any questions about these two items, I encourage you to listen to the replay of our second-quarter earnings conference call, which was held in July and is available on the investor relations section of our website.

In closing, let me repeat that our paramount goal for 2008 was to once again return to a record quarterly earnings pace. We have accomplished that in each of the past two quarters and we now want to continue to improve on that level of earnings. We are operating in the most challenging environment in many years. But with our good growth in earning assets, and the improvement in our net interest margin so far this year, and with our relatively good asset quality, sound capital position, and abundant sources of liquidity, we think we are in a reasonable position to capitalize on numerous opportunities and achieve modestly improved earnings growth in the coming quarters.

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

(Operator Instructions). Matt Olney, Stephens.

Hello, Matt.

Good morning, George. I wanted to ask you about CD repricing. It seemed like it was very favorable during the quarter. Can you give us kind of a rough idea of the pricing of some of the CDs that will be maturing during the remaining part of the year, and what is the pricing on some of the new CDs that will be replacing some of the old CDs?

Well, we've got CDs maturing at all sorts of pricing, from very low pricing to very high pricing. And we will be replacing those with CDs that will be pricing from very low to moderately high pricing. Generally, there -- I guess there are a few phenomenon going on that probably merit a comment in that regard. Number one is we still have quite a few CDs that were issued 12, 15, 18 months ago that will be rolling off in the fourth quarter and even the early part of 2009. That should, based on where CDs are pricing today, should result in those CDs repricing at a lower level. So the trend that we have experienced should occur -- continue to occur to some degree of higher-pricing CDs rolling down to a lower level of pricing.

The second force that is muting the benefit of that somewhat at this time, and I think will continue to mute the benefit of that in Q4 and into the first part of '09, is we have seen a number of institutions who appear to be significantly stressed for liquidity and, as a result, are pricing up very aggressively. And, you know, I saw another banker making a comment about Countrywide, and, of course, with them going away and WaMu, with them going away, hoping that some of the guys that had been under more significant stress for funds would moderate that pricing.

But with commercial paper markets seized up as they are in other sources, it seems like even a lot of the large banks, we've seen a lot of the large national banks and regionals being very aggressive on pricing CDs. And that is tending to hold up the cost of CDs, and not give us further relief that I would have hoped we would be getting at this point.

So, our general expectation is that we think the cost of funds will continue to go down somewhat because of repricing older, higher-rate deposits down. But I don't think we're going to get as much of a bump there as we would like to the margin, just because I think there is a very aggressive need for deposits out there.

Now what is helping us really good in that regard is, even though 54.8% of our loan portfolio is variable rate at September 30, 56.8% of those variable rate loans, a little more than half of those variable rate loans that we had, are at their floor rate. So over half of our variable rate loans did not adjust downward in rate as a result of the last move in the Fed funds target rate and prime rate. And a large percentage of those loans that were not at their floor rate or LIBOR-based loans, and LIBOR hasn't moved too much and in fact, has moved in a positive spread. So it is a very dynamic market in trying to manage and predict what's going to go on with your net interest margin because there are a lot of unusual forces at play there.

But with all that said, we feel pretty comfortable with the guidance that I just gave that we think our Q4 margin will be in the 382 range, or somewhat higher. And that takes into account what we think will be a somewhat dilutive effect on our net interest margin this quarter from the remaining balances of our temporary investments and tax-exempt securities.

Do you think your margin guidance would have been any different had we not had the 50 basis point cut recently?

Very little, if any, different. The quantity of loans that are not at a floor or not being impacted by the unusual spreads on LIBOR are almost identical to the quantity of immediately repricing borrowings that we have. So, the 50 basis point cut appears in, at least in the short run, to be pretty much a non-event as it impacts our margin.

I want to shift over to the credit quality. We've heard more and more concern about the credit quality in Texas, as some would say, the next shoe to drop. Can you compare what you're seeing today in the Dallas-Fort Worth market to what you saw in northwest Arkansas maybe a year or two ago, in terms of underwriting standards and the amount of excessive speculation that went on during that time?

I don't think there is a -- I don't think there is a comparison. I believe northwest Arkansas, as compared to Texas, is in a league of its own as far as the level of excess in supply that developed there. I believe the supply/demand metrics in metro Dallas are much, much closer to an equilibrium supply/demand situation. So I view that as a very different situation.

What about as far as the actual underwriting standards in Dallas? Are those concerning at all to you?

There was a massive difference in loans that are done, for the most part -- or that we have done in Texas and stuff that we have seen done in northwest Arkansas. And, you know, I've commented many times publicly that Texas is such a capital-rich state, and has so many private equity sources within the state, that it is very common for transactions there to be done with a lot of equity. And most of the deals we have done there have had, if it was a really skinny deal, 15% to 20% cash equity and most of them, that's been fairly atypical. A lot of them have been done with 30%, 40%, 50%, or even more cash equity in them than that.

So in Arkansas, I have commented a number of times that, while there are a lot of very wealthy people in Arkansas, that even if you're doing a deal for a wealthy person, because of his strong financial statement, that person expects to pretty much borrow out on the transaction. So there were -- there were an almost countless number of transactions that were done by our competitors in northwest Arkansas that were done with no equity in them. And that's just not the -- that's not the norm in Texas.

And we've always, even though we've required equity on almost all of our Arkansas deals, had very few exception-bucket transactions that didn't have a minimum regulatory mandated level of equity in them. In Texas, we've almost always gotten considerably more equity because it's the norm down there. And the stronger capital and wealth position of that state makes that the norm. So I don't see any significant parallels in northwest Arkansas and a Texas market of the future. I think that whoever is saying that, I think, is ill-conceived.

Now, there were some guys that probably got -- individual institutions that got overly aggressive in parts of the Texas market and did some things, and I've commented that our loan growth in 2007 was our lowest annual loan growth in a number of years because we saw a lot of business lost to guys who were doing it on more aggressive credit terms that we wouldn't do. And we lost some deals in Texas that were done with much less equity than we would've required in those transactions. And the institutions that did those deals and that sort of deal may be having some problems from that. But again, I think that's not the norm in that market.

Very good, thank you.

Peyton Green, FTN Midwest Securities.

Good morning. You all had a great deposit-gathering quarter on the savings and interest-bearing transaction side, and I was just wondering if you could comment where the momentum came from. Is it out of your own CDs, or is it something where you have just been visibly able to grab more deposit share? And what your outlook for the future is on that?

There was a noticeable improvement. Our -- at the end of the quarter, our non-CDs were 38.45% of deposits, which is the best ratio, I think, we have had since -- you probably go back to, like, December of '05. So we were pleased to see that.

We are seeing good deposit growth in a number of our markets, and one of the things I mentioned in the press release is that because we have abundant sources of liquidity, we have not had to compete with some of the more aggressive deposit-gathering efforts from some of the big national and regional franchises that have been very aggressive in deposit pricing. We were able to pick from a menu of liquidity options to fund our balance sheet and to fund our growth, and that let us pick some of the lower-cost options.

So we had a good quarter. I guess I would say that there are two things that I would say are noteworthy about our deposits in the quarter. And one is, is that we picked some markets where we wanted to gain some share and thought we could gain some share on a reasonably cost-effective basis. We were relatively aggressive in those markets and accomplished some good growth.

The second side of that first point is, is that there were markets where we had competitors paying very high rates and we did not chase those rates, and we lost some share in those markets just because it was just way too expensive to pay up for those deposits. So the fact that we had a lot of options on liquidity and deposit gathering helped us significantly.

One other thing that shifted that interest -- our CD/non-CD mix in the quarter -- dealt with broker deposits. At the end of both quarters, I think we had about 19% of our total deposits in brokered deposits, but the shift in the quarter, in the third quarter, was that a lot of brokered CDs rolled off and we were able to replace that with a lot of much less expensive non-CD brokered deposits. So our brokered deposit level, I think, was more or less flat for the quarter on a total basis, but a lot of that shifted away from higher-cost CDs to much lower cost non-CD brokered deposits. And when I'm talking lower cost, I'm talking in the low 2s range on the non-CD brokereds. So that helped our margin.

I think that mix going forward, we expect to -- in the fourth quarter, we expect to roll off a number of additional brokered CDs and replace those with non-brokered, locally-generated deposits in Q4 because we think we can do that in a very cost-effective way. So that's really what's going on on the deposit side. But we're viewing that as pretty positive. We could have grown deposits a lot more in the quarter, had we been willing to sacrifice a little more margin to do it. But we were -- we had a lot of options, so we chose, I think, wisely from those options, improving the fundamental mix of our deposit base while at the same time doing it in a way that also let us improve our margin.

I guess going forward, is there -- do you care if -- is your preference to reduce the brokered deposit side down to zero, or is it just one of many options to fund the balance sheet and you view it against the other alternatives still?

You know, it's one of many options to fund the balance sheet. And we will use it when it's appropriate and cost-effective to do so. Now we have changed our policy just because we read the American Banker and Wall Street Journal, just like you do, and we know that the regulatory winds have shifted on brokered deposits. So, reading some of that literature back in the late second quarter or early third quarter, we modified our policy to limit our brokered deposits effective December 31 of this year to a maximum of 15% of our total deposits. So we're at about 19.47% at the end of the third quarter. So we are expecting to roll off a chunk of those in Q4, and replace them with locally-generated deposits from various markets.

We see no problem doing that, and at this point, we can do that pretty much on a -- pretty close to a dollar-per-dollar basis on the cost. So we will lower that level, not because we think there's anything problematic or wrong with brokered deposits, but we just realized the regulatory winds have shifted, and you try to cater to those regulatory winds where you can. If, on the other hand, I could get brokered deposits at 2% and nonbrokered were costing me 4%, then we would ignore the regulatory winds and -- run the bank for the benefit of the shareholders.

What was the mark to market on the securities portfolio at the end of September?

Paul, do you have that?

Yes, it was negative 10 million.

Well, the total in the capital account was a negative $10,384,000.

At June, it was a negative 8 million.

That was a couple million additional negative mark, compared to the June 30 number. And that's the tax affected number in the capital account.

And then, considering, kind of, your competitors' issues, is there any opportunity to broaden out loan growth, and are you seeing more opportunities on the owner occupied real estate side, or C&I side?

Yes, almost all of our growth in the last quarter came in the commercial real estate book. It went up -- $47 million on the, what we call non-farm, nonresidential -- the commercial real estate book. The construction and land development portfolio dropped $1 million, [eye growl] was up $2 million and change, multifamily was up a couple of million.

Otherwise, it was very small changes. Almost all the growth and the change in the portfolio was in the commercial real estate book. With -- there was a time there, a couple years ago when almost every project, once it was built and completed, went into some sort of commercial mortgage-backed security, whether it was a good project or not. And we lost a lot of good business that we would normally do for deals where we would do two-year, three-year, five-year loans for a customer on a completed project, amortizing loans. And that was a good source of business for us, and that -- a lot of that business went away because of the commercial mortgage-backed securities markets. And with those markets basically blown up, we're getting a chance to keep a lot of that stuff and put a lot of that stuff on our books now. And that's traditionally been an excellent business for us, so we're glad to see it return.

When you look at a loan like that, what does it look like today compared to what it would've looked like a year ago?

It's got a lot more equity in it, and it has a lot higher rate on it.

Is that stuff that's floating or are you doing some fixed, or --

Most of that stuff is floating. We do some fixed, but most of it is floating.

Great, thank you very much.

Dave Bishop, Stifel, Nicolaus & Company.

Peyton and the other fellows hit a lot of my questions, but sort of circling back to the last comment about loan growth, and mostly from the commercial real estate portfolio, sort of focusing on the schedule in your 10-Q here. I know you've seen a lot of growth in the hospital/surgical centers and other medical. Maybe give us some, maybe some granularity in terms of what types of properties, what types of projects are generating that growth.

I don't think that is -- it's not a ton of growth. We've got -- several of those projects, and -- you know, they're very good projects. One of them is a facility here in Little Rock that comes to mind. We -- the facility basically just went into final completion a quarter or two ago of their second phase. They had -- it was -- we had the original facility financed, they were totally out of space, so they needed a second facility. So we -- or expansion, they basically doubled the size of it. We financed that for them and it moved -- it was in our construction loan book until they completed that and got their certificate of occupancy and their licenses on the expansion and then it moved to our CRE book. It's a large group of local doctors. It's a multi-practice, multi-discipline surgical inpatient facility, and does very well. We've got an LTAC facility, a long-term acute care facility, in the Dallas area, that again is a large group of local doctors there that own that facility. And there are several other, lesser loans in there, but that book of business is doing very well, we think.

How about as we think about into '09 and the loan pipeline, relative to what we're seeing from the broader economy there? What are some of the, maybe, expectations in terms of loan growth for next year?

We will probably -- have a similar expectation for loan growth next year as we have had in '08, in a low teens to a high teens sort of growth rate. We will get some more guidance on that in our next call in about 90 days, after we have really completed our '09 planning process. But just the general sense that I have in talking with our guys and looking at pipelines and so forth is that's probably what we will be looking for.

I'll give you an idea of the magnitude of opportunities. In the month of September, we fielded about $3.8 billion in loan applications. We did a quick scan on all those in 10 minutes, a pop type deal, and narrowed that down to about, I think, $140 million or $150 million that we actually worked on, and somewhere between one-third and one-half of those will probably ever get approved and closed. So the credit markets are fairly seized up, and guys that have a good contact base as we do, and have done business with a lot of folks, we're seeing -- what for us is an almost infinite level of opportunities.

And what we're trying to do is just wade through that avalanche of opportunities real quickly, real efficiently and narrow it down to a universe of projects that look like they are either extremely good projects in a target zone that we like and a geographic area we like, or projects that just have extraordinary support from the sponsors and guarantors, and hopefully both, and pick the cream of the cream to work on.

Did you say $3.8 billion?

That's correct. That's September.

Great, thank you.

And obviously, we're not going to work on that many loans, we're not going to make that many loans, but that gives you an idea of the level of opportunities that are out there. My guess is, if we're doing a good job, we're probably throwing loans in the shredder that most other banks in the country would love to have.

Brian Martin, Howe Barnes Hoefer & Arnett.

Just on that loan piece -- the loan growth this quarter, were there a lot of smaller credits? Were there any larger-sized credits in there? It sounds like there was more of the smaller variety this quarter, without the construction stuff. Was that the case?

I would have to go back (technical difficulty)

Hello?

Sorry, I'm not sure what happened. We lost you there for a moment. Brian, are you still there?

I'm sorry. I thought I lost you.

Okay, thank you. We're back there. I'm not sure what happened. But Brian, in response to your question, I'm not sure if any of that answer got through or not.

No.

The question was, was there any large credit that contributed to our growth. And the answer is none, none really comes to mind that stands out. There may have been something in there, but I would have to dissect that to really give you that. But no, I think it was pretty much (multiple speakers)

A broad base.

Yes.

In the Texas and Arkansas breakdown on the loan and deposit side, do you have that?

I do, and once again, Texas accounted for pretty much all the growth. At September 30, our Texas loans were 27.0% of our portfolio. And when I say this, this is not necessarily loans in Texas, but loans originated by our Texas offices.

Right.

Our Texas offices accounted for 27.0% of the portfolio, our North Carolina offices accounted for 4.6% of the portfolio, and the Arkansas offices were about 68.5%. So Texas was basically up about 3.2% from June 30. Our Texas deposits also were a significant source of growth. They grew from 11.3% of deposits at June 30 to 12.1% of deposits at September 30. So Arkansas went down from 88.7% of deposits to 87.9% of deposits at June 30.

How about -- just shifting to credit quality for a second. You talked about some of the nonperformings that are still paying or still performing. Has that percentage changed or has it been pretty constant for you here?

I don't track that percentage, so I don't know. My sense is that it's a smaller portion, it's less than half of the nonperformers, and I don't even know what the percentage is. But it's a smaller subset of those nonperformers that we've got on nonperforming status, but they are still paying. They're not past due and the reason we've got them on there is we just don't have confidence that they're going to continue to perform long term.

And last quarter you talked about just the unallocated portion of the reserve. Can you tell us where that stands this quarter?

Yes, it went up just a touch farther. Last time, I think I said it was 28%, and we actually rounded up from, like, 27.8% or 27.9% to 28%. And this time, that number is, I think -- I don't have the number right in front of me -- 28.3%, I believe, unallocated. So we're just continuing to build that a touch, just because -- I mean, it's a crazy world with such uncertainty out there.

Right. And then, just a couple last things. Just on the nonperforming side, and I guess specifically on the nonaccrual side, was there -- that number is pretty constant, second quarter to third quarter. Is it -- was there a lot of inbound and outbound, kind of, activity in there, or is it kind of as constant as it looks there? I know that you had the charge-offs and you have some stuff moved to OREO. But, just kind of those nonaccruals -- .

There is a lot of activity in and out of that portfolio, and I'll give you an example on that. In the first two weeks here of this month, I've just -- I keep a little notepad on the side of my desk just to keep track of these things. And we have had $636,000, so you know, I mean, not a huge number, but kind gives you an idea of the velocity in and out. We've had $636,000 of nonaccrual loans, OREO or repo items either sold or paid off in full, fully finally liquidated. And the net impact of those transactions was a plus $28,000 to either recovery to reserves or income. So there's several hundred thousand dollars a week typically going in and out of those accounts.

So the percentages may be very similar quarter-to-quarter. The composition of the assets comprising those is quite different. I think we sold, in the last two weeks of September, I think we had three or four items sold. I know of at least three, and there may have been four liquidated out of the OREO account alone that were probably -- approached $1 million.

And the largest nonperforming asset at this point is how large? (multiple speakers)

I have no idea.

Just the last thing, do you know what the FDIC -- your FDIC insurance cost was for the quarter?

We've been at five basis points for --

It's $288,000.

$288,000, yes.

Thanks a lot, George.

And that's five basis points and, of course, everybody in the first quarter of next year, the whole industry is going up seven basis points, as I understand it.

To 12.

To 12. So we will be at 12 basis points in Q1, and we've already been modeling, and based on our preliminary models and the formulaic calculations that would apply, we would expect in -- based on -- if we pro forma'd our existing ratios to a second quarter of '09, we're looking at a 10 to 11 basis point range there. Somewhere above 10 and below 11 basis points.

I appreciate that. Thanks, George.

[Allen Vortel].

Two questions. One, I don't have the whole press release in front of me, but your risk-based capital ratio -- where is that and where do you like to keep it? That's one question. The other is, when the stock tanks so much -- I guess it was during the third quarter, where there short-sellers doing that, or were there particular sellers who had to bail out, or were there particular rumors --

On the -- okay. Let me give you the capital ratios first. The leverage ratio at September 30 was 9.36%, which was up from 9.01% at June 30. The Tier 1 risk-based capital ratio was 11.34% at September 30, which was up 14 basis points from 11.20 at June 30. And the total risk-based capital was 12.35%, which was up 20 basis points from 12.15% at June 30.

Now the only time I ever look at those ratios is when I am reviewing the draft of the Q or the K. Otherwise, I don't pay any attention to those ratios. The way we manage the Company from a capital position is, number one, we are going to make sure that all of those ratios are within well-capitalized status. That's a long-stated goal, is to maintain regulatory well-capitalized status. But the way we really manage the Company day-to-day is we're looking for tangible common equity, excluding the mark to market adjustment on the securities portfolio that we think is just [pay] performing. We're looking for our tangible common equity ratio to be not less than 6% and not higher than 7.5%. And Paul, we're probably about two-thirds of the way up --

6.86.

Yes, 6.86. So we're a little above the midpoint of that target range as of September 30.

As for what the activity in our stock was about there in June, I think it was, when the real volatility in our stock really took a hit, I don't know. I've told many people that I don't pay attention to who owns our stock. The only time I ever know that is when an investment banker tells me somebody owns our stock, and I usually promptly forget that. I don't know who buys our stock, I don't know who sells our stock, we don't monitor that. And I don't mean to hurt anybody's feelings by saying we don't care, but our focus is simply to run the Company. We try to run the Company, manage our affairs day-to-day, and let the stock take care of itself. So I don't know what all that activity was about in June. I'm glad it's over. It was distracting.

You do admit it was distracting. Thanks, George.

Peyton Green, FTN Midwest Securities.

I was wondering if you could comment on the role in your construction and development portfolio over the next three months and 12 months, and what degree of lumpiness that there is there, and how you evaluate if somebody has a project that needs to take longer to sell out. What happens at that point when they can't pay off the loan but it's still a worthy credit?

The way we handle that, if it's a worthy credit and if the customer is capable of continuing to pay interest and -- is working the project in an appropriate manner, then we will renew the credit and continue to work with them. And that's not an uncommon thing. Projects all the time get underwritten on the assumption that they're going to be a 24-month project and they become a 36- or 48-month project.

The key is to have a borrower who has the financial wherewithal to weather that and pay the additional interest and taxes and other costs that it takes to see that project to fruition. So, and if we've got customers that simply have run out of ability, then that's -- that's what we've got in our nonperforming loan book now. Customers who had construction projects, home loans, or development loans or whatever, and they simply ran out of resources and ran out of ability to make their payments, and could no longer financially support the project or managerially support the project, and as a result, we're in the business.

So, our sense is that most of our customers are pretty solid and doing pretty well. And hence, we've continued to give the guidance we've given about net charge-offs and loan losses.

As far as what matures in the next 30 days or 60 days or 90 days, I couldn't really give you any color on that. Our lenders and division presidents are monitoring that and working that stuff. I am aware of things that we'd consider to be either problem credits or watch credits, and we're working those and that -- we have all those in mind when we've given you our guidance here on charge-offs.

So I think it is business as usual here, as I said earlier in the call. Certainly, I will comment, and it should be no surprise to anyone, that even really good projects in this economy are taking longer to develop and play out than they would have been in a more robust economy. It's tough out there in the overall economy, and that affects everybody, even your good projects. But we are very fortunate that we've chosen sponsors and guarantors and capital structures that have lots of equity and resources behind the vast majority of our projects so they can withstand that without a hiccup. And that's why we get to have business as usual.

Thank you.

Andy Stapp, B. Riley & Co..

Great quarter, guys. I think you mentioned that you had $3.8 billion of applications in September. What's a normal run rate there?

That is abnormal.

Yes.

And we have been running at abnormally high levels for several quarters, and it is getting higher. And it's just simply a fact that so many of the large institutions, particularly, that we compete with on larger transactions are pretty much seized up and (multiple speakers) -- as far as being able to fund anything. So that's an extremely high number.

Yes, obviously. Also, there has been a lot of speculation that CRE is the next shoe to drop. Can you tell us what you're seeing there?

I think there probably is a lot of exposure in CRE as a broad universe. But again, it depends on how particular CRE credits are underwritten. And if you have got appropriate leasing and pre-leasing on those projects, and you've got appropriate tread on the leases, and you've got appropriate equity in the projects, I think those are the key elements there.

You know, what do you really have in your CRE portfolio? Dave Bishop was asking about our medical credits, and we've got those transactions structured where either the doctors jointly and severally or pro rata guarantee the loans, or -- jointly and severally or pro rata guarantee an operating lease that is assigned to us that basically guarantees the cash flow to repay the debt. We've competed against a lot of guys and lost a lot of medical project loans to other lenders that required no guarantees from the doctor groups that did those projects, or very short guarantees that burned off in a year, or two years, or whatever.

So, it's all a matter of structure. If the transaction is properly structured, your CRE portfolio is going to perform pretty well. If the transactions were overly aggressively underwritten, and you didn't have adequate equity into the projects or adequate guarantor support or adequate take-out commitments, then your CRE portfolio is not going to perform very well. So, it's all a question of underwriting.

Great. Thank you.

Matt Olney, Stephens.

You've discussed loan pricing in recent conference calls as being very favorable compared to previous years. You think your outlook on loan pricing could change, given some of the recent government intervention that's kind of designed to help encourage other banks to lend more?

Who knows? You know, every day you read these audacious headlines of stuff that's being conceived in Washington, and you just shake your head and wonder what the heck is next. At this point, a lot of the big banks have so many problems, I don't know if you buy $700 billion of their bad assets, or if you put $125 billion of capital into big banks, I don't know that it puts them back in business.

You know, there is a -- our business model is, as I would describe basically, there are three key elements of our business model. And one of those elements is to have adequate capital. And Allen asked about that, and I said 6% to 7.5% tangible common equity. And one of our elements of our business model is to have a diversity of reliable and dependable funding sources, including, at the head of that list, a broad deposit base that is locally originated and is a true relationship with us.

And the other side is to be able to generate really good quality assets and large volume based on thorough underwriting documentation and servicing and relationships with our customers.

The big investment banks on Wall Street, and even the big commercial banks, don't have any of those three things. Their capital accounts were leveraged 20 or 30 to 1. There's a lot of intangibles in their capital account, but there is a lot of stuff in the capital account that's not common. They're much more dependent upon other forms of capital than common equity. So they don't have the strength of capital account that we do. They don't have -- even the big banks are heavily dependent upon commercial paper markets and other non-deposit funding sources. They're trying to get much more into deposit funding, so they don't have that stability of funding, and their funding sources are much more costly.

And while they have capabilities to originate assets like we do, they also buy a lot of their assets and you end up with a lot of stuff on their books that's pooled stuff that somebody else originated, that they bought as a structured derivative type assets that I don't think is probably as good a quality as our bricks and sticks. We underwrite it, we know we're going to keep it when we underwrite it, it's sort of the way to do it.

I think our very traditional community bank business model is a lot better than their business model. I think even if they get a lot of capital infused and get a lot of assets bought off their books, I think those guys still have so many problems that it may be a long, long time before they actually are able to drive the economy forward again. But you are in a better position to gauge all that than I am.

I appreciate your insight, George, thank you.

There are no further questions at this time.

There being no further questions, that concludes our call. Thank you, guys, for joining us today. We look forward to talking with you in about 90 days. Thank you. Have a good day.

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