Bank Ozk (OZK) 2009 Q1 法說會逐字稿

Good morning. My name is Kamisha, 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 2009 earnings release conference call. (Operator Instructions).

Thank you. Ms. Blair, you may begin your conference.

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 first quarter of 2009 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, beliefs, estimates and outlook for the future, including statements about economics; housing market; competitive; credit; unemployment and interest rate conditions; revenue growth; net income and earnings per share; net interest margin, including our goal of maintaining a favorable net interest margin in 2009; net interest income, including our goal of achieving record net interest income in each subsequent quarter of 2009; non-interest income, including service charge, mortgage lending and trust income; non-interest expense; our efficiency ratio; asset quality, including expectations for our net charge-off ratio; our allowance for loan and lease losses to total loans and leases ratio; and our other asset quality ratios, including expectations for resolution of certain credits; loan, lease and deposit growth; and changes in the yield and volume of 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 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. We are very pleased to report excellent first-quarter results, including records in both net income and diluted earnings per share. This was our fourth consecutive quarter of achieving record net income and record diluted earnings-per-share, and both measures were up a stellar 19.6% compared to the first quarter of 2008. These record quarterly earnings are particularly gratifying as they were achieved in the midst of a very challenging economic environment. A number of factors contributed to these record income statement results, including our ninth consecutive quarter of record net interest income, further improvement in our net interest margin, a strong contribution from our investment securities portfolio, our best quarter of mortgage lending income since the third quarter of 2005 and a record 36.9% efficiency ratio. These favorable income statement results are certainly satisfying, but several actions to further fortify our already strong balance sheet are equally important.

First, during the quarter just ended, we sold our SLM Corp. bond. You may recall that we had taken an other than temporary impairment charge for this bond in last year's fourth quarter. This was our only investment security about which we have had any significant credit quality concerns, so we are very pleased to have it sold.

Second, during the quarter we made aggregate provisions to our allowance for loan and lease losses totaling $10.6 million. These provisions included $5.6 million calculated in accordance with our formula for determining allowance adequacy, $3 million of additional provision resulting from our annual review and recalibration of our allowance allocation percentages for different risk categories and types of loans and leases, and $2 million of additional provision for certain types of loans in certain geographic areas which may have an elevated risk as a result of current economic conditions.

Third, throughout the first quarter, we thoroughly reviewed the carrying value of each item in our other real estate account, and we adjusted those values downward by $535,000 to reflect updated estimates of net present value of expected sale proceeds.

Fourth, our capital position has gotten stronger and stronger in recent quarters. Over the past four quarters, our common stockholders equity has increased 26.6%, and our book value per common share has increased 26.2%, while our total assets have grown 3.5%. Obviously this has further enhanced our already well-capitalized ratios, including increasing our ratio of tangible common equity to tangible assets to a robust 8.37%.

Let me sum up management's thoughts on the quarter this way. Yes, we had another excellent quarter of earnings, and we are equally pleased that our already strong balance sheet became even stronger during the quarter. We think we are very well-positioned for continued success.

We've got a lot to talk about today, so let's get to the details.

Net interest income is our largest source of revenue. One of our long-standing goals is to achieve record net interest income in each quarter. In the quarter just ended, our net interest income increased 39.5% compared to the first quarter of 2008 and 5.6% compared to the fourth quarter of 2008. This resulted, as Susan said, in our ninth consecutive quarter of record net interest income.

There are two ways to increase net interest income. You can either expand your net interest margin, or you can grow your earning assets, or ideally, as we did in the first quarter of this year, you do both.

In each of the last six quarters, our net interest income has benefited from improvement in our net interest margin. In the quarter just ended, our net interest margin was 4.73%, up 104 basis points compared to the first quarter of 2008 and up 21 basis points compared to the fourth quarter of 2008. This improvement in our first-quarter net interest margin was due to a combination of factors, including favorable deals achieved on a number of new tax-exempt securities, primarily municipal housing bonds, which we purchased in the fourth quarter of 2008 and early this year, and further improvement in the spread between our yields on loans, leases and our other securities and our rates paid on deposits and other funding sources.

Even if you ignore the yield on our securities and the cost of our non-deposit liabilities, we have had significant improvement in our net interest margins. Some people might refer to this as a core net interest margin or a core net interest spread. Specifically the spread between our yield on loans and leases and our cost of interest-bearing deposits has increased from 3.77% in the first quarter of 2008 to 4.42% in the first quarter of 2009. And you will note that what I referred to as core spread is about as good as our overall net interest margin.

Growth in average earning assets in the first quarter of 2009 also contributed to our record quarter of net interest income. Average earning assets in the quarter just ended were up 15.8% compared to the first quarter of 2008 and up 3% compared to the fourth quarter of 2008.

In our last four conference calls, we have discussed that our net interest income in each respective quarter of 2008 benefited from our investments in certain tax-exempt securities which we expected to be relatively temporary. We also stated in each of those calls that we expected these investments would go away as conditions in the credit markets normalized and yields on these securities returned to a more normal level or as these securities were called away. Our volume of these so-called temporary investments had declined to $85 million at December 31, 2008, and as expected, the volume of these securities declined rapidly over the first quarter, and they are now fully paid off.

Achieving record net interest income in each subsequent quarter of 2009 will continue to be one of our goals. To achieve this goal in the coming quarters, we will once again need to achieve growth in earning assets or improve our net interest margin or hopefully do some of both.

In our January conference call, I said that we expected loan and lease growth in 2009 of 10% plus or minus, and I noted that we were more likely to see loan and lease growth below 10% and above 10%.

In the quarter just ended, our total loans and leases declined modestly for the second consecutive quarter. Many factors negatively impacted the first-quarter loan and lease growth. The most important factor was simply the economy. Recessionary economic conditions diminish the demand for credit. For example, many of our customers who are builders and developers are reducing rather than expanding their inventories.

Despite these factors we are still making good quality new loans and leases, and we are seeing many opportunities to take business from competitors. Accordingly, despite our declining loan and lease totals in the first quarter and our expectation that the recession will continue throughout much or all of 2009, we still expect positive loan and lease growth for the full year of 2009 most likely in the high single digits in percentage terms.

We have closed several large loans in the fourth quarter of last year and the first quarter of this year, but because of the substantial equity requirements on those loans, we have advanced only nominal funds to date. In addition, we have improved several more large loans which we hope will close in the second quarter.

In regard to investment securities, in our January conference call, we said that we expected new purchases in 2009 to roughly offset maturities, calls and prepayments in that portfolio. Our investment purchases in the first quarter of 2009 did not fully replace the total of the $85 million of so-called temporary securities that paid off and our other first-quarter sales calls and maturities. As a result, our investment securities portfolio declined $55 million from December 31, 2008 to March 31, 2009.

We have stated many times that we will manage our securities portfolio with a view to maximizing our long-term returns, buying when we believe it is advantageous to buy, and selling when we believe it is beneficial to sell. Therefore, the volume of our securities portfolio may increase or decrease during 2009 based on changes in market conditions, changes in our balance sheet or other factors.

We expect to maintain a favorable net interest margin in 2009. In our January conference call, we said we believed we could achieve net interest margin in 2009 at a level approximately equal to or slightly above the 4.52% level achieved in the fourth quarter of 2008. Our results were somewhat better than expected in the first quarter of 2009 as our net interest margin was 4.73%, up 21 basis points from the fourth quarter of 2008. There were no significant unusual items which boosted our first-quarter net interest margin, so that appears to be a reasonable starting point for projecting our net interest margin for the coming quarters.

Let's shift to non-interest income. First, income from deposit account service charges is traditionally our largest source of non-interest income. This category of income decreased 2.4% in the first quarter of 2009 compared to the first quarter of 2008. We believe the decrease is attributable to the lower level of economic activity in general.

In our January call, we said that based on our expectation for continued economic weakness in 2009 we expected service charge income in 2009 to be roughly equal to service charge income in 2008. Based on our first-quarter results, we now expect a slight decline in service charge income in 2009 compared to 2008.

Mortgage lending income for the first quarter of 2009 was our best quarter of mortgage lending income since the third quarter of 2005. This was quite a turnaround from the fourth quarter of 2008, which at that time was our worst quarter of mortgage lending income since the third quarter of 2001. Obviously we are encouraged by this turnaround.

While refinancing activity accounted for 77% of our first-quarter mortgage volume, we did see an increase in refinancing requests for new home purchases over the course of this quarter. Of course, housing market conditions are still weak, but with the recent declines in mortgage rates and the federal government's various plans to maintain low mortgage rates and stimulate the housing market, there is some prospect for better levels of both refinance and purchase activity in the coming quarters. Who knows how all this will actually affect our mortgage lending income, but it is at least nice to be able to say something hopeful about mortgage volumes for a change.

Our trust staff continued to add new accounts and grow existing relationships during the first quarter of 2009. This resulted in a 7.1% increase in trust income for the first quarter of 2009 compared to the first quarter of 2008. We still expect that trust income for the full year of 2009 will increase 10% to 13% compared to 2008.

Our first-quarter non-interest income got a big boost from $4 million of net gains on securities. During the fourth quarter of last year and early in the first quarter of this year, we purchased a significant volume of municipal Housing Authority bonds. You will recall that we discussed these purchases in detail in our January conference call. Based on the recent increases in market prices of these bonds and our evolving assumptions regarding interest rate risk in light of recent developments in government, monetary and fiscal policy, we decided that it was probably prudent to recognize a portion of the gains on these securities and adjust slightly the overall interest rate risk of our securities portfolio.

Non-interest expense increased 25.8% in the first quarter of 2009 compared to the first quarter of 2008. This large increase was due to a number of factors, including the previously mentioned $535,000 write-down in the carrying value of items of other real estate. In addition, higher FDIC insurance premium assessments applicable to all FDIC-insured institutions, the cost of reissuing thousands of debit cards in response to the Heartland Payment System data security breach, and higher loan collection and repo expenses and various other increases in expense categories contributed to this higher level of non-interest expense.

Notwithstanding this increase, our first-quarter efficiency ratio of 36.9% was our best ever quarterly efficiency ratio. Of course, our net gains on securities and from sales of other assets improved this ratio approximately 375 basis points. But even if you ignore the gains, that is still a very favorable efficiency ratio of 40.7%.

In our January conference call, we stated that our expectation was that our efficiency ratio for the full year of 2009 would be at or below the 42.3% level achieved for our 2008 efficiency ratio and that we would continue our quest to get to a point where we can sustain a sub-40% efficiency ratio.

In the second quarter of 2009, we expect that our non-interest expense and efficiency ratio will increase as a result of a proposed FDIC special assessment on all insured financial institutions. But perhaps more important though is the fact that we expect gains on securities in the second quarter will offset all or substantially all of the costs of such special assessments.

Another of our key goals is to maintain good asset quality. Economic conditions nationally have continued to weaken in recent quarters, making our traditional strong focus on credit quality even more important. Even though most of our markets generally appear to be less severely impacted by this economic weakness than many other markets, there is no doubt that the increasing duration and depth of the global and national recession is having a negative impact almost everywhere.

During the quarter just ended, the trend in our various asset quality ratios reflected the weakening global and national economic environment. Our ratio of nonperforming loans and leases to total loans and leases at March 31 was 1.15%, which is up 39 basis points from December 31. Our March 31 ratio of nonperforming assets to total assets was 1.17%, which is 36 basis points higher than at December 31. 41 basis points, effectively all of the increase in our nonperforming loans and leases, and 26 basis points, the majority of the increase in our nonperforming assets from December 31 to March 31, was due to one credit in North Carolina which totals $8.1 million. This credit was over 30 days past due at December 31, and it was one of two past-due credits we discussed in detail in our January conference call.

If you will recall, this credit consists of two cross-collateralized loans with a combined loan to cost of 64% and a combined loan to appraised value based on a recent reappraisal of 42%. The customer made some payments on these loans in the first quarter and is currently working on a sale of both properties. In fact, there seems to be a general agreement between the prospective buyer and the seller, and we are now processing a loan application for the prospective buyer. All this looks very promising.

If this sale closes, we expect to be fully paid off on both loans, and if the sale does not close, we may have this property and other real estate owned at some point in the future. Under either scenario, we expect little or no loss on this credit because of the substantial 30% cash equity investment and the strong recent appraised value.

In our last conference call, we also discussed a large loan in Texas which was past-due as of December 31. The collateral for this loan has been subsequently sold by our borrower, and the purchaser assumed our loan and brought it fully current. We incurred no loss of principal or interest on this transaction. As expected, this was a happy ending, largely attributable to the fact that this transaction was well structured from the beginning with a desirable piece of collateral and substantial cash equity.

As a result, there were three potential buyers vying for the opportunity to purchase this property at a price equal to or exceeding the full amount due us.

This is a good example of a proverb I have stated many times, "Blessed is he who has lots of good collateral." We try to focus on quality projects, and we strive to get substantial cash equity, particularly on larger transactions. The relatively good performance of our loan portfolio is largely attributable to our underwriting principles, including in no small part our cash equity requirements. While good collateral and substantial cash equity may not avoid a loan going past-due or even into non-accrual status, those factors do facilitate resolution of problems, and they typically minimize or eliminate any loss exposure.

Our 30-day past-due ratio, including past-due non-accrual loans and leases, was 2.24% at March 31, down 41 basis points from December 31. Our first-quarter annualized net charge-offs ratio was 64 basis points. In our January conference call, we said that based on our own assumptions for 2009 credit environment we assumed credit losses as follows. And this was for the conditions there.

One, that economic conditions will deteriorate further in 2009 with national employment approaching a 9% to 10% level. Two, that economic conditions will continue to decline throughout the first half of 2009 and perhaps throughout the entire year of 2009 before bottoming out. And three, that the recovery thereafter will be slow to develop momentum.

Given those assumptions, we said that we expect that our net charge-offs for the full year of 2009 to be approximately 70 basis points of loans and leases. Our assumptions about economic conditions and our 70 basis point estimate of net charge-offs for 2009 have not changed.

While all of our asset quality ratios continue to be relatively good compared to recent data for the industry as a whole, we acknowledge that deteriorating economic conditions in recent quarters have impacted our asset quality results. Notwithstanding the moderate deterioration in our asset quality ratios, we will repeat what we have said for 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 importantly, we think that any such increases if they do occur will not seriously affect our ability to generate a good level of income or even a record level of 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 each of the last four quarters did not prevent us from posting record earnings in each quarter.

During the quarter just ended, we made provisions to our allowance for loan and lease losses totaling $10.6 million, which was our largest quarterly provision ever and was 3.35 times our net charge-offs for the quarter. With net charge-offs of $3.2 million in the first quarter, this resulted in a $7.4 million increase in our allowance for loan and lease losses. The significant reserve building increased our allowance to 1.86% of total loans and leases at March 31, an increase of 80 basis points from March 31 last year and 40 basis points from December 31. We think this action conservatively provides for the uncertainty resulting from current economic conditions and trends. The unallocated portion of our allowance at March 31 was 22% of our total allowance, which is in the upper half of our 15% to 25% target range for the unallocated portion of our allowance.

In our July conference call, we provided extensive details regarding some of our practices for accounting for and structuring loans, practices 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 aggressively and promptly conducting thorough impairment analyses on non-accrual loans and leases and regularly reevaluating the carrying values of foreclosed and repossessed assets, making adjustments as necessary to reduce the carrying value of those assets where appropriate.

Second, we have been aggressive in placing loans on non-accrual status when we believe significant doubt exists regarding the ultimate collection of payments.

And third, we consider our practices regarding interest reserves for construction and development loans and capitalization of interest on loans as very conservative and constructive.

If you have any questions about any of these items, I encourage you to listen to the replay of our second-quarter 2008 earnings conference call which was held in July and is available on the Investor Relations section of our website.

In closing, we are very pleased with our record first-quarter results. There are some offsetting unusual items in the quarter, specifically the securities gains on one hand and the large increase in our allowance for loan and leases on the other. Loan and lease losses, excuse me.

Our very strong revenue growth more than offset a higher level of operating expenses and provision expense giving us another record quarter of net income and diluted earnings per share. We have now achieved record net income in 40 of the last 49 quarters, including the last four in a row. We feel we are in an excellent position to continue that positive trend, and that will be our goal.

Now we acknowledge that we are operating in the most challenging environment in decades. But with our fine staff, good growth in revenue, the strength of our allowance for loan and lease losses, our relatively good asset quality, strong capital position and abundant sources of liquidity, we think we are in an excellent position to effectively manage through any challenges ahead, capitalize on numerous opportunities and achieve good results.

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

(Operator Instructions). Andy Stapp.

I just want to make sure I understand you. You still stand by your net charge-off guidance that you expressed last quarter of 70 bips?

Yes, we do. I think that is still good guidance, and our first-quarter number came in a few basis points below that. My best guess is, Andy, that those first-quarter results are pretty indicative of where we will be for the year.

Okay. You mentioned that part of the provision was related to some recalibration of your reserve model. How much of that was one-time catchup?

Well, we recalibrate that model annually or more often if we deem it appropriate to do so. The last time we did that recalibration was a year ago. So I would say that is an annual -- I would say that's an annual catchup.

The other thing that we did -- and then that was about $3 million roughly. And the other thing that we did is, you know, a part of our portfolio is in Charlotte, other North Carolina and South Carolina markets and a couple of other markets where those markets are experiencing more stress than our markets, say, here in Central Arkansas or Dallas and so forth. We went in and for all construction and development loans and all CRE loans in those markets for which we had not calculated a specific reserve or an impairment reserve, we assigned just broadly to all those construction and development CRE loans in those stressed markets an additional 100 basis points of reserve allocation, and that was about $2 million of additional provision. And if those loans -- if we thought those loans were going to be problems, we would certainly have done a special reserve for them, or we would have done an impairment analysis if they had been at that level of problem status.

But we also realized that while those loans do not merit extra attention specifically, that if some of those loans do become trouble at some point in the future because of conditions in those markets, our loss profile on those loans would be moderately higher perhaps than the loss profile of a loan in a more healthy market such as Little Rock and Dallas. As a result, we just felt it was conservative given the uncertainty of the economy today to assign some additional loss allocation to those credits.

Okay. And going back to the recalibration of your reserve model, does that mean that as conditions stand now, you would have higher provisions going forward, but you would not have as much as you would this quarter because you only do that annually? Is that correct?

I think if I understand your question, yes, I think your thinking on that is correct. We would not anticipate that sort of recalibration adjustment. In my view of it, both the recalibration adjustment and the allocation of additional provision for those stressed markets was an adjustment to our reserve outside of what I would consider a normal level of adjustment.

Okay. Could you tell me what construction and development loans to total loans was as of March 31?

As of March 31, our construction and development loans were 600, and this included land loans. Construction development and land loans were $691 million, which was 34.7% of the portfolio. That is down $3 million from $694 million at December 31 when it was 34.4% of the portfolio. So it is up 3/10 of 1 percentage point but down $3 million, so for all practical purposes essentially unchanged.

Okay. And would you also happen to have what raw land and developed land was?

Well, that is in that construction and land development line. That is all in that total.

It would be fairly similar to year-end then?

Andy, I don't have the breakout on that here or the annual report to look at, but my sense is that there's probably not been a lot of change in that.

Now, of course, loans come in and out all the time, but my guess is there has been very little change in the overall composition percentage wise.

I also noticed that your reserve coverage of NPAs was almost exactly 100%. Is that coincidence, or is that 100% sort of a floor?

Total coincidence.

Okay. I will let some other people get on.

Joe Stieven.

Good quarter. George, a couple of things. Big picture, deposit loan pricing and how your competition is acting in your markets without mentioning names? That would be number one.

And number two, can you talk about your tax rate with the fact that the municipals could be -- have been going down somewhat, will your tax rates sort of normalize a little bit more? So those two. Thanks, George.

Well, two things. First, on the deposit pricing, as we have said since you and I first talked when we went public in 1997, we always got somebody in some of our markets that we think is paying more for deposits than is appropriate. But we have been lowering our deposit costs for a number of quarters now, and of course, the expansion in our margin and the spread between our loan costs or loan yields and deposit costs continue to improve in Q1, and that margin expansion was primarily a result of lowering our cost of funds more significantly than yields declined on our earning asset.

So we have been pretty effective in reducing deposit costs, and we are still doing that and expect further reductions ahead, which is certainly one of the reasons that we are positive on our margin being maintained somewhere north of that core level of 452 and think that the margin level for Q1 of this year is a good clean number. There were no unusual items in it, and that is a good starting point.

So as far as competition there, I would say that they are no egregiously bad players that are really impacting our markets significantly.

Because six months to nine months ago, there were some pretty big players pricing up, and that has sort of abated is what you're saying.

That has. Now we've got a little bank here and a little bank there that are doing things that are just totally goofy, but they are very small players and not having much of an impact in the market.

In regard to the effective tax rate, I think our Q1 effective tax rate is pretty indicative of where we think we are. Now, of course, if we add a lot of municipal securities, that will change that. If we sold a whole bunch of municipal securities, that would change that. But we are not contemplating a major shift in the mix of our balance sheet between taxable and nontaxables, and as a result, we think that is -- the number for Q1 is probably a pretty good starting point for penciling out a number for the coming quarters.

Okay. Thank you.

Jordan Hymowitz.

Congratulations on an excellent quarter, first of all. You deserve a lot of credit compared to what a lot of the people reported.

I have three quick questions. One, you have built the reserve huge this time to 185. Could we assume that you talked in the beginning this year about 10 basis points per quarter. If there is no change in credit quality, i.e. you have a 70 basis point net charge-off, will the reserve continue to be built, or will it be maintained at approximately this level?

I don't know that I know the answer to that. I know that I don't know the answer to that for sure. I mean a lot of that is going to depend on the economy. I think our decision to recalibrate our reserves and assign some additional reserves to loans in markets that are experiencing a greater than average economic stress -- I mean that in the sense of our average; not the world's average of stress -- I think that was a conservative action on our part. It reflects the fact that, boy, you just read lots of really extreme sort of assumptions and reports on the economy and commentary on the economy from different sources, and it just led us to take a more conservative view of the economic outlook than we might have taken 90 days ago. And I say that and at the same time there are sporadic signs of quite a bit of activity.

For example, in the last 15 days of April, we closed five or six OREO sales, and so far this month through close of business yesterday, we had sold five pieces of OREO that totaled $971,000, and we had gains on three and losses on two and the net loss was $8700. And we have got probably five or six more under contract to close, and I would guess a serious buyer circling on five or six more all at prices right around where we have got them booked at.

So there are budding signs here and there of things getting better and some positive things. You know, you see that, and you're encouraged by that, and the mortgage volumes are up, and you are encouraged by that. And in each month in the first quarter, our actual purchase mortgage volume went up percentage wise. So we were encouraged by that. And then you pick up the newspaper or you go listen to Fox or CNN or somebody or CNBC, it just paints a very dreary picture of the world.

So I would say that our provisioning and our reserve billing in Q1 was our choice for reserve billing to look at the dark side of the data coming from the economy and not look at the bright side, and we viewed that as a very conservative action.

So the five piece of OREO you sold in April, what was the balance of that approximately?

That we sold so far this month? 900 -- their book value at March 31 was $972,000.

And final question is, can you disclose the NPAs by region like you do in the Q and the reserve by region or property class, either one?

I cannot disclose the reserve, but if I can find the right piece of paper here, I can give you the nonperforming assets. Arkansas accounts for $20.8 million of nonperforming assets. So basically what would that be? About 4/7 of the little over half of the NPAs are Arkansas. North Carolina is $9.9 million, and of course, I have already talked about that one asset that we hope will get resolved. It is a little over 8.1 of that. South Carolina is $3.6 million, and one of the South Carolina assets was 400,000-some of the OREO sales so far this month. Texas is $2.2 million, and other states account for $400,000 of our nonperforming assets.

So given that most of the construction portfolio or a substantial portion of it is in Texas, that portfolio is still performing remarkably well.

Well, yes, I would say it is performing well. I will give you a couple of statistics on that. The unemployment rate in Arkansas in February was 6.6%. The unemployment rate in Texas was 6.5%, and of course, at that time the national unemployment rate was 8.1%. So Arkansas was 1.5% below the national average. Texas was 1.6% below the national average. By comparison North Carolina was 10.7% and South Carolina 11%, well over 200 plus basis points over the national average. Hence, our decision to just make an arbitrary assignment of additional allowance for loan and lease loss provisions to even our good and moderate North Carolina and South Carolina credit.

But to give you another, there was an article in the paper this morning here locally that was talking about the surge in bankruptcy filings nationally. I don't remember what the number was up nationally, but you know a lot of states were up 70%, 80%, 90%. In March bankruptcy filings versus March a year ago Texas ranked 49th on that list. Their bankruptcy filings were up only 11% over a year ago, and there are 51 entries on this. This is the 50 states and the District of Colombia. So only Alaska and Louisiana had a better or a lower increase percentage wise in bankruptcy filings than Texas. Arkansas ranked 41st on the list. Meaning there were 40 states that had a higher rate of acceleration in bankruptcy filings than Arkansas, and North Carolina interestingly ranked 29th, meaning there were 28 states that had a higher rate of acceleration in bankruptcy filings.

So our big markets of Arkansas and Texas were 49th and 41st on a list that you want to be down at the bottom of. That is good. And North Carolina was just a little better than the middle. The employment data in Arkansas and Texas is holding up very well. So we're feeling pretty blessed and fortunate to have the vast majority of our assets over 95% of our loans in Arkansas and Texas, which are doing very well on a relative basis to the rest of the nation.

And last thing, of the $691 million in construction development, do you have a specific loss reserve against that that you can break out?

We do have a specific loss reserve, but I don't have that data. It will be in our Q. And again, the allocation of those additional reserves to stressed markets was largely attributable to construction and development lines. It was. Everything in there, the basis for that allocation was the stuff that is considered to be CRE loans for regulatory purposes that includes construction and development land loans and non-owner occupied commercial real estate.

Matt Olney.

You gave some good color on the reserve build available to the more stressed markets than your portfolio. Outside of your NPAs and pass dues that were reported in Q1, were there any other specific larger loans that were internally downgraded in recent weeks or months that made you think that you should build reserves going forward?

Well, there were -- yes, I'm sure there were some loans that were internally downgraded. There were also a couple I know of that were internally upgraded because they improved quite a bit. So my guess is, and I have not looked at that data, but my guess is that there would be a slight or moderate downward trend in the risk ratings of the portfolio and that that would be consistent with the economy.

And specifically I've said that of our $10.6 million in provision, $5.6 million of that was accounted or calculated or derived using our normal reserve allocation formula. And since the portfolio actually shrunk slightly in the quarter, you can pretty much assume that all of that $5.6 million was a result of either specific allocations to loans or migration of loans within the portfolio. Because the total balance of the portfolio did not change, and our formula calculation for what we needed to make to the reserve before the recalibration adjustment and the special stressed markets adjustment was $5.6 million.

So in my mind -- I mean I know the accountants don't look at it this way -- but in my mind that was kind of our normal provision, and the $3 million and $2 million above that were unusual provision items. Did that answer your question?

Yes, that helps. And going back to the increased allocation from the stressed markets relative to the [C&D] and the CRE credits, did you go in there and did you reappraise those properties, or was it more just a kind of blanket reserve for --?

It was a blanket reserve. None of those loans are at a point problem-wise -- none of them are a problem. They are three and four-rated loans, and a four-rated loan in our Company is a moderate. I know regulators a four is a watch, but a five in our system is a watch. We have a more elaborate system. We have actually got like 20-something loan grades, and we kind of lump them into subcategories. But those were all three and four, which are good and moderate risk loans that we consider normal credit. We originate credits in those risk categories all the time. And so there were none of them that were considered to be a problem. It was just simply we made a decision to on a blanket basis assign an extra 100 basis points across the board to loans in those markets. Not based on any deterioration, as I said in response I think to Andy or Joe's question, not in response to any deterioration in of those credits, but just the realization that -- take North Carolina and South Carolina where you have got unemployment rates high 9s or high 10s to an 11% range. If you do have a loan go bad there, the risk profile of that loan incurring a greater loss is higher than if a comparably good loan goes bad in Little Rock right now where you have got a 6.5% unemployment rate.

So it just simply reflects the stress of the market. It was a somewhat arbitrary assumption, but I think it was an arbitrary assumption based on reasonable assessment of the conditions and my 30-years experience sitting in this chair, doing this job and looking at risk.

I would comment on one other thing. I know some of you are very diligent, and you pick up public filings that were placed yesterday. We posted a loan for foreclosure in a suburb of Dallas, Texas. It was, I don't know the exact amount of the loan, but it was about $6 million, and the name of the borrower, since it is a public record, I will go ahead and say it on the phone. It is Forney. That is a little community near Dallas, Forney 921 Land [Investors] Partners. And we posted that foreclosure. That will have no effect on any of our ratios because we don't -- while we are the servicing bank on that loan, we have a zero retained interest in that loan. It is all participated to another bank, and we've posted it and are foreclosing only half of that other bank. We are just the servicer. So those of you who are really diligent students and go out and pull a lot of data from the field, if you pull that and you think oh man, they've got a $6 million plus or minus bad loan going there in Texas, that extra effort to gain that information will actually mislead you. So be aware of that situation.

Matt, do you have any other questions?

Yes, I have one more question, George. I think previously you said you have got a few loans that were still current on their payments, but you decided to put them on nonaccrual to be conservative. Is that still the case in the first quarter, and can you give us an idea of how much this is?

There are quite a few loans that are on non-accrual that are current, that are not past-due, and I could not quantify that. I would guess we are talking a couple of million dollars. I mean it is not a big line item. But there are some number out there, and I guess we are talking 20 credits, something like that.

Dave Bishop.

A quick question for you back to the margin there. I think I heard you say there was nothing unusual in terms of the expansion. I was just curious I think in the fourth quarter you talked about in terms of the MBS you had bought at a pretty good discount there. The servicer was sort of reporting relatively conservative discount accretion in terms of what the average life actually was on these securities. Did you guys tweak that in terms of bringing more of that discount accretion into the interest income stream?

A little bit. On the taxable part of our portfolio, we've got -- we had about $600,000 of discount accretion on the taxable part of the mortgage-backed portfolio that went into income, net accretion into income discount minus premium amortization in the first quarter, and that was up from $215,000 in the fourth quarter.

Now I will tell you that is still a very conservative calculation of that. If we were using the Espiel method, which is the most widely accepted method, we would have been recognizing vastly more discount accretion. But we felt like with the Espiel method for recognizing our calculating prepayment speeds and average lives, and hence, the resulting discount accretion on that was too high period.

So we manually calculated using all the Bloomberg estimate of prepayment speeds and average life for each of the securities and provided that calculation of average life using Bloomberg, the average of all Bloomberg estimates for average life, we provided that to our securities portfolio of servicer, and asked them to rerun the discount accretions that cut those numbers significantly, like a couple of million dollars.

Because we just felt that was a more conservative and more appropriate and more realistic assumption. The Espiel method of projecting prepayment speeds in our view is projecting a higher level of refinance activity than will actually occur because of more stringent underwriting requirements and appraisal issues. We think that the Espiel method is overestimating prepayment speeds.

So we dialed that back down and came up with an objective and using average projected lives and calculating prepayment speeds on that was before the Espiel method kind of the state-of-the-art on how to calculate and project those. So we went back to the old way of doing it, asked our servicer to substitute that for the Espiel method because it came up with what we thought was a more appropriate and defensible assumption.

What was the remaining discount on that?

The remaining discount on our total securities portfolio net of premium is $39.6 million. There is $7.5 million of unamortized discount on the taxable part of the portfolio and $32 million of unamortized discount on the tax-exempt part of the portfolio. A lot of discount. We bought these bonds at very favorable prices.

Then maybe jumping back maybe a little bit more detail in terms of the Dallas credit you talked about last quarter, the ultimate resolution there? I think you alluded to the fact that they had found a buyer for that property.

Yes. They actually had a number of interested prospects. It got down to three finalists, and the transaction has been closed. The loan has been assumed, brought current, and we think that will go down the road without further problems. And that is -- I think we alluded in the January call that we believe that would be the outcome. This was an excellent piece of property. We were in it at mid-60s. I don't remember whether it was 63% or 65% loan to cost. There was a ton of cash equity in it, and it is a premier piece of property. So we felt that even in the current stressed economy that there would be an ample number of buyers that would want to own this piece of property and be willing to pay at least our loan payoff for it.

Just an overall aggregate in terms of the construction portfolio. I don't know if you have this number off the top of your head or at your fingers there, but in terms of just duration, obviously things are slowing down there from a construction and demand viewpoint. Any sense in terms of what that loan book in terms of pay down or duration looks like?

Well, certainly we are seeing less velocity and paydowns, which is exactly what you would expect in the portfolio. Now I can give you data on the -- if I can put my hand on it -- on the expected life of the portfolio and the repricing attributes of the portfolio. So this is variable rate loans and so forth, and basically 71% of the loan portfolio either matures or reprices in one year, 84% in two years and 90% in three years. So the portfolio is either predominantly variable-rate or matures and reprices.

As far as the cash flow runoffs from the portfolio, we have got that data. I don't have it at my fingertips. It would be difficult to provide you a meaningful summary of that data probably in the context of a conference call. It is pretty elaborate data.

[Alexandra Jennings].

Actually it is David Einhorn. I have got a couple of questions. On the loans -- the two loans that you resolved, one was brought current you said with a new owner and the other is about to be current, how much new equity did the buyers put into those deals relative to the loan size, and what is your philosophy of policy on re-underwriting those loans?

Our philosophy and policy is to re-underwrite the borrowers and get as much equity as we can. We actually had input into the buyer on the Texas property and probably went with a buyer who put in the least amount of equity because we felt like that buyer had the highest certainty and ability to close the transaction. So at the initial closing of the transaction, they brought our loan fully current, paid their costs and paid some other things and put a small amount of additional equity in it, and they are scheduled to make additional equity contribution to the property at various times over the life of the development.

So we did not load any substantial future reserves in that. But we think those guys will proceed with the project and we will do fine. We are not terribly concerned about that.

So what was the equity put-in relative to the loan?

I don't know that number. I would guess 5% or so.

Okay.

The transaction that we are looking at that we are underwriting now in North Carolina, the buyer of the property will basically assume the loans as they are paid and totally current and will not put in any additional cash equity at the time of closing, but we will provide substantial additional property as equity.

We are very comfortable with this because this customer has a mid-eight digit annual AGI, an upper mid-nine digit net worth, and lower nine digit cash and marketable securities balance. So this is a very substantial individual.

Right. And you're getting a guarantee of that whole balance sheet?

Yes, personal guarantee. Yes, that is the way it is being underwritten.

Excellent.

That transaction is not closed and so forth, but the buyer, prospective buyer and our borrower who is the seller seemed to have a meeting of the minds on a transaction so much so that we've got an application, and we are underwriting the loan application and expect to take it to committee probably next week.

So we are optimistic that that that will get done. I think it is very likely that it gets done -- I have been doing this 30 plus years, and it is never done until it is done.

Right. On the construction and development loans, what percentage has an end use of residential versus commercial?

I do not have that data. I'm sorry.

Do you have any guess?

You know, it is a very reversible portfolio. There is a lot of raw land in there. There's a lot of commercial land in there. There's a lot of commercial projects that range from hospitals and nursing homes and churches and schools and retail and office and residential and multifamily. I mean it is a very diversified portfolio. So I could not give you an intelligent guess, so I won't guess.

William Drewry.

A quick question for you with respect to the size and composition of your lease portfolio. Do you have some color that you can provide there?

It is basically a small ticket lease portfolio, and it includes everything that you would expect to find in a small ticket lease portfolio. There are telephone systems and copiers and computers and bulldozers and street sweepers and golf course loan maintenance equipment and concrete pump trucks. I mean it is just a very diversified small ticket lease portfolio.

Okay. And was that directly originated or sourced indirectly through brokers?

All directly originated.

All directly? Okay. Is it highly concentrated in the Arkansas area or --?

No, it is spread over a pretty wide geography. In fact, Arkansas is probably a very, very small piece of it. I think it's about a $46 million, $47 million portfolio. It is a good quality lease portfolio. With that said, leasing is the canary in the coal mine on credit quality. Because you're leasing tangible personal property, and by virtue of the fact that it is leasing, it is effectively 100% financed. So we've got some pretty high reserve allocations for that. Although it is a very well underwritten leasing portfolio as leasing goes, leasing has certain inherent risks.

So, for example, our assignment of reserves for the lease portfolio at March 31 were 4.02% of the portfolio and reflective of the fact that it is a lease portfolio and by definition it is 100% financed.

Fair enough. Do you also have some color as far as the duration of your muni portfolio at this point in time?

I can give you some information on the duration of the whole bond portfolio. The average life of the portfolio at March 31 we estimated at 6.06. Basically if you take that one decimal place, 6.1 years, and the modified duration of the portfolio we estimate it at 4.2 years. So moderate.

Okay. And lastly, the recalibration effort that you undertook recently with respect to your reserve methodology, would you attribute the large part of the change more towards loss severities or higher probability of default assumptions?

Loss severities. And the areas that got -- that really got the brunt of that increase were three categories where we have had more severe losses. Financing lease is one of them. We substantially increased our loss allocations for that category, and I have already talked about that. It is about a $46 million, $47 million book of business.

Junior lien residential we significantly increased our loss allocations in that category based on obviously declining home prices. That is a $33 million book of business for us. Certainly you can -- I probably don't have to explain why loss severities on junior lien residential properties have been more severe recently than historically.

And then the other thing is we basically doubled our allocation for watch loans in our risk rated loan book because, quite frankly, the loss severity had not been any higher, but the watch loans get to watch and they fall one of two ways. They either get well and go back into the non-watch categories, or they get worse and are downgraded to a more severe category.

So in that case, the tendency of those loans over the last year to migrate into a more severe category as opposed to getting well has been higher, so we doubled the loss allocation for watch loans. And then the other area that got recalibrated was consumer credit, and obviously we do a lot of -- in our local markets for our local customers, we do a lot of typical small consumer lending and close everything from some unsecured stuff to auto and recreational vehicles, ATVs, boats, that sort of thing. All those areas with people getting laid off are experiencing higher loss experience. The consumer book of our business is $71 million.

So interestingly, the areas where we really had a recalibration were not the areas that everybody worries most about because our loss experience has not deteriorated that much in the construction development CRE stuff. Our recalibration stuff was primarily consumer, second lien residential and leases.

Joe Fenech.

Can you discuss your thoughts on TARP? Are you thinking about repaying it? Have your thoughts on it changed since you decided to participate as we have seen from some other banks? What are your current thoughts there?

Yes and yes. Yes, we're thinking about repaying it. Yes, our thoughts have changed. We have got a team of folks evaluating that right now. We can certainly afford to pay it. We took it because we believed that capital would afford us significant opportunities to look at FDIC failed institutions and do some other things that we might not be able to do with that. Since we took it, just because of slowing economic conditions, our loan portfolio has actually shrunk a little bit, and our ability to find good investment opportunities has diminished from where it certainly was late in the third quarter and early in the fourth quarter of last year.

So so we are looking around and saying, gosh, buying a failed FDIC institution and taking on the operating costs of that institution and acquiring a bunch of deposits, where would we go with them? And the opportunities to go someplace with those has diminished to some degree.

So we are continuing to evaluate that. And I shared I think publicly a couple of times that our [Allco] committee made the decision on a split decision 6 to 2 vote to participate in it. I did not vote in it because I thought it was an absolute total tossup. And our Allco committee is meeting this Friday to reevaluate that in anticipation of a board meeting next week, and I don't know what the committee will recommend. There are still folks in the committee who think we should keep it, and there are folks in the committee who think we never should have taken it, and they are going to have a very interesting discussion. And I'm going to sit back and watch that discussion, and then they are going to present their findings to our board next week.

But we don't need it, we could give it back, and we are seriously considering the possibility of doing so.

Okay. Great. And just a housekeeping question. You gave the problem assets by state. Can you also give us the loan balances at March 31 by state?

I don't have that information. Wait, I do. Hold on, I do. Let me -- I will give it to you in percentage terms. Texas was 30.48% of our loans, Arkansas 64.79% and North Carolina 4.73%. So Arkansas and North Carolina down slightly, Texas up slightly. Since Texas is the strongest economy in which we are operating, we like that trend.

And South Carolina?

The Carolinas are lumped together there.

Okay.

And that is by state of originating office. So the South Carolina stuff that is originated out of our North Carolina is there.

Now we do have a South Carolina loan and a North Carolina loan originated out of our Texas office. So those are technically in the Texas totals that I have given you because this is by state of originating office. We will have the geographic breakdown in the Q. But it has not changed much from what was in the annual report, very modest changes I think in the composition of that and probably a little more Texas and a little less of other stuff.

Great. Thanks.

Do we have any more questions?

Brent Christ.

In the prepared remarks, you alluded to selling some securities in anticipation of the FDIC assessment in the second quarter. Could you give us a sense of how much you have sold or how much in gains you have locked in so far relative to that expected cost and maybe what the muni balances are down to now?

We have -- I don't have that exact number here. We have sold $30-something million and booked in $4.4 million of gains. And our assumption, we are still operating under the assumption that it is a 20 basis point assessment because that is the -- which would cost us about $4.5 million, $4.6 million estimate. And the 20 basis points is the official communicated that is out there from the FDIC. There has been considerable discussion that that would become 10 basis points. There has been some discussion that it might even be less than 10. But we tend to prepare for the worst around here, so we are operating under the assumption it is a 20 basis point assessment.

Now with that said, you will note that in our financial statements the after tax effect of the mark-to-market adjustment on our securities portfolio after-tax is about $25 million at March 31. So divide that by our effective tax rate, that's just in real round numbers about $40 million of positive mark-to-market on that portfolio. So harvesting $4.4 million of gains from the portfolio is not an appreciable amount of the potential that is out there.

And then it looked like on the accumulated other comprehensive income line that you just mentioned, it increased by about $10 million versus the fourth quarter?

The quarter over quarter change is $9,927,000, so exactly, and that's all a result of a more favorable market valuation of that portfolio.

Could you give us a sense of where those securities are now carried relative to par?

As I said earlier and if I can re-find that, the net discount in the portfolio is $39.6 million discount to par is our book value on that. So that discount number sort of gives you an indication of where the mark-to-market is. They are very similar sort of numbers on the discount and the portfolio at March 31 versus the mark-to-market is very similar sort of number coincidentally.

Bill Roy.

In the fourth quarter, you had $24 million of your construction land portfolio in the 30 to 90-day delinquency bucket. I was wondering if you knew what portion of that cured in the first quarter or if you have the actual 30 to 90 delinquency numbers for the construction land portfolio in the first quarter? That would be great as well.

I'm sorry, I don't have any breakdown on that. The only color I can give you on our past dues is there is one Texas loan in there that is an apartment loans that accounted for 74 basis points, so basically almost a 1/9 of our past due loans. And this is an operating apartment loan; it has been on our books for awhile.

Early in the first quarter we picked up on a management issue with this apartment, and our discussion with the borrowers was unproductive in helping us identify what the situation was. So we hired a mystery shopping team and sent them over there and had the project mystery shopped and identified the issues that were going on with the project and met again with management and got them to change management. We put in with management's acquiesces a soft sweep whereby we are receiving all the money on the project now and releasing money from a sweep account to pay legitimate operating expenses on the property and then paying our project. And honestly, if we had not mystery shopped the deal, we never would have identified the management problems there.

But that has been fixed. That loan was carried in past dues at about 60 days past due. The occupancy rate on the project is getting better after just plummeting for several months. We think it will take us about nine months to work this thing totally back to current. Based on the rate they are leasing out properties and generating free cash flow, we think we will still be about 60 days past due on that project at June 30. We think we will have it to just close to 30 days past due at September 30, and we believe we will have it current by December 31. It is getting well, but it is one that required a little intervention on our part to identify the problems and get it fixed.

So that was about a 1/3 of our past due ratios, and that is certainly the one Texas loan that got assumed and paid current and taken over by another party. Coming off the past dues and this apartment loan going on in the past dues was the real big in and out on that list during the quarter.

And department loan was categorized as multifamily?

Multifamily, yes.

David Bishop.

Yes, thanks, George, that is sort of a good segue to my question. Just in terms of Texas in general, obviously there are some schools of thought there that the state is entering a recession obviously later than some of the coastal markets out there.

On the commercial real estate commercial side there, I mean what are you seeing maybe from getting a comfort level there in terms of your loan portfolio and just the market in general on the commercial real estate side that shows you things may not be as bad as people think out there? Because it sounds like most of the recalibration, reallocation was related to maybe the Carolinas thus far. Like you alluded to the unemployment rates holding in there better than Texas and Arkansas. But any other anecdotal support you can provide there that thus far gives you comfort?

Well, we are seeing a lot of activity down there of a positive nature, and it is not severely over-built with bankruptcy filings in the state. I mean in the entire state of Texas there were 4521 bankruptcy filings in March. That is not much, up 11% from a year ago, and the unemployment rate down there last reported was 6.5%. That is certainly up a bunch from where it was, but we are still talking 6.5%. That is not a terribly bad number.

And we are -- as we saw with that one project, there are buyers for projects at reasonable prices that will take over existing loans. We have had other projects down there that for one reason or another the borrower was not doing as well as he should have been doing and sold the project and somebody else took it over and paid this off or assumed our loan and keep going with the project and so forth.

So there are people in Texas that are in economic distress like there are in every other jurisdiction just about in the country today, probably every jurisdiction in the country. The fact of the matter is there is still a lot of wealth in Texas, a lot of liquidity in Texas, a very good economy in Texas. So we have seen when things begin to go sideways down there instead of falling off the cliff and blowing up like they might in Florida or California, if you have got a good project and you've got plenty of equity in it, originally if it was well structured and well margined originally, you can work out of those things in a pretty orderly manner, and that has been a point that I have talked about a lot, and I still think a lot of people don't get it.

We get in our transactions a lot of equity. And, as I said today, that does not -- in most of them, we get a lot of equity. That does not necessarily keep them from going past due. It does not necessarily keep them from going nonaccrual as in the case of that North Carolina loan I talked about today. But if you've got enough equity and you are in a great piece of property at a low enough basis, you have got a real good shot of getting out with no loss. And even if you incur loss, it is a minimal loss. And honestly that has been the key to us avoiding any big problems from our construction and development portfolio is it is by and large a very well margined portfolio with lots of equity, and that has provided us enough margin to work out of these things with little or no loss.

Does not necessarily mean they do not go past due. People have problems. But it does mean we have been very successful in working out of issues without them ever becoming a problem that resulted in a hit to our income statement.

Just circling back to the prior question, I guess you alluded to the fact that within that portfolio where the construction maybe 71% re-prices or paydowns or matures within a year and sort of driving the mid to high single-digit loan growth forecast there, where do you see sort of that bucket or that gap being filled in terms of replacement or paydowns?

Well, we are looking at a number of projects now that we have approved and are in the process of approving that are income producing projects or construction and development projects. I mean we are still doing construction and development loans every week. We are closing construction and development loans. I know the guys who have an abnormal phobia of our construction and development loan portfolio probably just fell out of their chairs and are rolling around on the floor thinking we have lost our minds.

But we've got a vast number of very good builders and developers that are still building and developing property and making money successfully doing it every day, and that is our customer base. Just because it is out of fashion optically in the eyes of some analysts in New York that we've got a big construction and development portfolio, I'm not going to quit doing sound business with long established customers who have strong balance sheets and good income results and pay us like clockwork and are people that we are going to be thrilled to death to have as customers 10 years from now just like we were 10 years ago.

So we are still doing that book of business. We are going to keep doing it in a sound and prudent manner with lots of equity. Because that is good business, and we manage it well. We run it well. It is like that apartment project. We know we do things that a lot of bankers would not do. I mean I doubt that there are many bankers in the country that if they had an apartment project that was losing occupancy and they could not get what made sense as logical answers from the owner on it, that they would send a team of mystery shoppers over there and shop the project and figure out what the problem was and then go tell the owner. We are very active in our management of the portfolio, and I think we do a really good job.

Joe Stieven.

George, my question was regarding TARP, and I think Joe Fenech already asked it so I'm fine. Thank you again.

Jordan Hymowitz.

Two more quick things. First of all, in response to David Einhorn's question, in the Q you broke out last time at about $225 million was specifically designated as commercial or basically nonresidential. Has this shift been material in the quarter, or is it about the same?

Let's see, our non-foreign non-residential went from 540 or $551.8 million at December 31 to $549.6 million. So a $2.1 million decline there, and it went up in percentage from 27.3% to 27.6%. So a little up percentage wise; a little down dollars. No big change.

So in the Q it has -- and this is September, so I apologize -- but it had land development non-residential 105 and construction, industrial and commercial as 125 for a total of 230. So is that number about the same, so we are talking apples-to-apples?

I don't have that level of breakdown at my fingertips here, Jordan, but I would -- and, of course, we will provide that data again in the upcoming Q in about 20 or so days. But I don't think there has been a big shift in it.

Okay. Also, the $39 million in the securities portfolio, this [39.6], two quick things. However, how many years is that coming into earnings?

At the rate that we recognized it in earnings in the last quarter, it is probably three and a half years or something at that rate. I think we took $600,000 in discount accretion on the taxable part of the portfolio, and ignoring things that paid off in the first quarter, I think we had $300,000 or $400,000 of discount accretion on the tax-exempt part of it. So we are recognizing it fairly conservatively. That is a quarter, so I mean that would be over like 10 years.

And if you had recognized the formula -- I cannot remember how you called the terminology -- but how much would you have recognized more than the $1 million?

I don't know the exact number on that. Using a weighted average life consensus prepayment speed model versus the Espiel method because we only ran the Espiel method for a couple of months and then we just quit because it was producing the same very wide results.

But in December when the aberration really started coming up, I think it would have been like $1.6 million or $1.7 million of additional income. In January it would have been close to $1 million of additional income. And so we just -- it was not prudent to believe that model. So we just backed off and used a more old-fashioned but what I think under the circumstances a model that is producing more sound and reasonable results.

Not that any of us live in sodomy anymore, but if you have three and a half years left -- so let's just round it up to four years at $40 million, that would be $10 million a year.

Well, I messed up there, Jordan, because I said three or four years. But then I realized I was taking a quarter number. About $1 million a quarter versus $40 million, that would be 10 years. So at the rate we recognize that, there was $1 million or so of discount accretion taken into income in Q1, and we have got $39.6 million left on the books. So that would be 39 quarters, 39.6 quarters, not 39.6 months. So I made an error in what I said there.

But the current run rate of prepayment is actually two to three times faster than that if the current level of prepayment would stay?

Yes, and all the models are saying that the prepayments are going to accelerate, so who knows?

Andy Stapp.

With the securities you sold in the first quarter and those that you anticipate to sell in the second quarter, I would think there would be less accretion of the discount. Why wouldn't that negatively impact the margin? Is it just not that material?

It is on average those things are pretty consistent with our average overall margin. So that we bake that into our guidance in saying that the assumption of the Q1 margins is a pretty good starting point. We already factored in when we said that we factored in what we had sold and what we have already sold so far this quarter. And at this point, we are done selling. Now we might sell some more later, but we have no present plans to sell anymore at this time this quarter. So that was factored into what we said about the margin.

Okay.

Good question.

And the Dallas project that was sold, was that related to the Trinity River project?

It was the Trinity River project which was well publicized. When you have a really significant piece of dirt like that and to get that bill off dead center we posted it for foreclosure in early January, and we intended to get our borrower's attention and corporation by doing so. We also got calls from almost every politician in Dallas because it is a critical important piece of their redevelopment plan south of downtown Dallas. So we heard from just about everybody down there wanting to make sure that we were going to get that in the hands of somebody that was going to use it for a critical development for that area just south of downtown Dallas. So that is the project well publicized and much discussed.

There are no further questions at this time.

Thank you, guys, for joining our call. There being no further questions, that concludes our call. We look forward to talking with you again in about 90 days. Have a great quarter. Thank you. Bye, bye.

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