Bank Ozk (OZK) 2009 Q2 法說會逐字稿

Good morning and welcome to the Bank of the Ozarks second-quarter earnings release conference call. My name is Sylvia and I will be facilitating the audio portion of today's interactive broad cast.

All lines have been placed on mute to prevent any background noise. (Operator Instructions)

At this time, I would like to turn the event over to Ms. Susan Blair, Head of Investor Relations for the Bank of the Ozarks and Executive Vice President in charge of Investor Relations. Ms. Blair, you may begin your program.

Thank you and good morning. The purpose of this call is to discuss the company's results for the second quarter of 2009 and our outlook for upcoming quarters.

Our goal was 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 economic, real estate market, competitive credit market, unemployment and interest-rate conditions including recent changes in US government monetary and fiscal policy, revenue growth, net income and earnings per share, net interest margin including our expectation of maintaining a favorable net interest margin in 2009, net interest income, 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; loan, lease and deposit growth; and changes in the 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 a 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 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're very pleased to report our second-quarter results including our fifth consecutive quarter of records in both net income and diluted earnings per common share. There were a number of significant positives in the second quarter notwithstanding an unusually large charge-off from a single credit relationship in Northwest Arkansas.

A number of factors contributed to our record $9.5 million net income and our record $0.56 diluted earnings per common share. These factors include further improvement in our net interest margin, our best quarter of mortgage lending income since the third quarter of 2003, record trust income, a strong contribution from our investment securities portfolio and a record 31.2% efficiency ratio.

Our favorable income statement results combined with several changes in our balance sheet have given us an increasingly strong foundation for the future. We believe that our demonstrated revenue-generating capabilities, our 8.63% tangible common equity ratio and our 2.19% allowance for loan and lease losses ratio, our favorable deposit base, our abundant sources of liquidity and our essentially neutral interest-rate risk position all equip us to perform well in turbulent times and capitalize on opportunities which may arise.

We have a lot to talk about today. The second quarter was a noisy quarter with a number of unusual items. But I think you will agree that we had another excellent quarter earnings and our already formidable balance sheet became even stronger. Let's look at the details.

Net interest income is our largest source of revenue. One of our long-standing goals is to increase net interest income each quarter.

Of course there are two ways to increase net interest income. You either expand your net interest margin or you grow your earning assets or ideally you do both.

Our second quarter 2009 net interest income was $30,262,000, a very favorable 28.2% increase from the second quarter of 2008 but a slight 0.2% decrease from this year's first quarter. While our second-quarter net interest margin improved 7 basis points compared to the first quarter of this year, that improvement did not fully offset the quarter-to-quarter reduction in average earning assets during the same period. Let me give you some details.

In each of the last seven quarters, our net interest income has benefited from improvement in our net interest margin. In the quarter just ended, our net interest margin was 4.80%, up 103 basis points compared to the second quarter of last year and up seven basis points compared to the first quarter of this year.

This improvement was achieved even though we charged off the accrued interest on a large credit relationship in Northwest Arkansas which went on non-accrual status and ultimately moved to other real estate owned during the quarter and we settled a substantial volume of investment securities including many good yielding, longer-term securities.

Despite these actions, net interest margin improved primarily due to the further improvement in the spread between our yields on loans and leases and our rates paid on interest-bearing deposits. Specifically, the spread between our yield on loans and leases and our cost of interest-bearing deposits increased 30 basis points from 4.42% in the first quarter of 2009 to 4.72% in the second quarter of 2009.

The continued improvement in our net interest margin in the quarter just ended almost offset the $176 million reduction in average earning assets from the first quarter to the second quarter of 2009. The reduction in average earning assets was primarily due to our reducing our investment securities portfolio by $218 million during the second quarter.

This reduction was undertaken based on our ongoing evaluations and evolving assumptions regarding interest-rate risk including consideration of the potential effects of recent United States government monetary and fiscal policy actions. As we continued to sell investment securities in late April and May, we realized that the resulting reduction in our earning assets would make it difficult if not impossible to achieve record net interest income in the second quarter.

But our guidelines for interest-rate risk management dictated these balance sheet adjustments. It may take us a quarter or even several quarters to get back on a record quarterly pace for net interest income.

To do so, we will have to grow earning assets, continue to improve our net interest margin or a combination of both. Let me share our thoughts on the prospects for growth in earning assets and net interest margin. First, earning assets.

Loan and lease growth has been a challenge in recent quarters as recessionary conditions have diminished the demand for credit and the quality of many credit applications. Our loan and lease growth was slightly positive in the quarter just ended but it was nothing to write home about.

Over the last four quarters, our loan and lease portfolio has actually declined 0.7%. Despite the difficult economic environment, we are still making good quality new loans and leases. We're seeing opportunities to take business from competitors and we are seeing good loan applications from borrowers refinancing out of commercial mortgage-backed securities.

Accordingly, we still expect positive loan and lease growth for the full year of 2009 although we expect that the ongoing recession will keep that growth well short of the 10% growth rate we had hoped to achieve this year.

In regard to investment securities, we stated many times that we will manage our securities portfolio with a view to maximizing our long-term total returns, buying when we believe it's advantageous to buy and selling when we believe it's beneficial to sell. Therefore the volume of our securities portfolio may increase or decrease during the remainder of 2009 based on changes in market condition, changes in our balance sheet, changes in our assumptions regarding interest-rate risk or other factors.

Now in regard to net interest margin, we expect to maintain a favorable net interest margin for the remainder of 2009. In fact, despite the changes in our securities portfolio, the second-quarter net interest margin of 4.80% appears to be reasonably sustainable.

Accordingly, we expect that net interest margin for the remainder of 2009 will be slightly above or slightly below that 4.80% level. If our net interest margin is relatively stable in the coming quarters, then obviously our ability to get back on a record quarterly pace for net interest income will depend on how quickly we can effectively grow our earning assets.

One of the factors contributing to our favorable net interest margin has been the improving quality and profitability of our deposit base. Although total deposits have declined in recent quarters as we have adjusted our balance sheet for the downsizing of our investment securities portfolio, there have been two favorable trends regarding deposits.

First, our non-CD deposits have grown significantly. From June 30, 2008 to June 30, 2009 total non-CD deposits grew $192 million and increased from 36.3% to 48.3% of total deposits.

Secondly, brokered deposits have been significantly reduced as deposits from local customers have grown nicely. Specifically over the last four quarters, total brokered deposits decreased $340 million from 18.8% of total deposits at June 30, 2008 to 4.3% of total deposits at June 30, 2009.

At the same time, our total locally generated deposits increased $165 million and accounted for 95.7% of total deposits at June 30, 2009. Not only have these changes helped to improve our net interest margin, but they also have favorable implications for future business development opportunities and service charge income.

With that said, let's shift to non-interest income. Income from deposit account service charges are traditionally our largest source of non-interest income.

It decreased 2.4% in the first quarter of 2009 compared to the first quarter of 2008. But in the quarter just ended, it reversed directions and increased 2.7% compared to the second quarter of 2008. As a result, service charge income was up a combined 0.2% in the first half of 2009 compared to the first half of 2008.

Based on the first six months data for this year, I will now reiterate our January guidance for service charge income which was that we expect service charge income for 2009 to be roughly equal to service charge income in 2008. Mortgage lending income was a pleasant surprise in both quarters this year.

Our first quarter mortgage income of $861,000 was our best quarter of mortgage income since the third quarter of 2005. Our second quarter mortgage income increased further to $1,096,000 which was our best quarter of mortgage income since the third quarter of 2003.

These results are very encouraging. Refinancing activity accounted for 77% of the first quarter mortgage volume but only 66% of the second quarter mortgage volume. That means that the increase in loan requests for new home purchases which we saw developing during the first quarter and discussed somewhat I think in our last conference call, continued to gain steam in the second quarter.

Obviously this is a positive and hopeful sign for the housing industry and the economy in general and our markets. Of course housing market conditions are still weak by historical standards but these signs of improvement are very welcome.

Our trust staff has continued to add new accounts and grow existing relationships this year. This growth increased second-quarter trust income to a quarterly record of $751,000 which was a 19.4% increase compared to the second quarter of 2008.

Trust income for the first half of 2009 was up 13.4% compared to the first half of 2008. That is roughly in line, in fact at the top end of our January guidance, which was that we expect trust income for the full year of 2009 to increase 10 to 13% compared to 2008. We have maintained that guidance since January and we continue to do so.

Our second-quarter non-interest income got a big boost from $16.5 million of net gains on sales of investment securities. The turmoil in credit markets over the last six quarters has allowed us to make a number of investments in high quality bonds at very favorable prices and yields.

Based on our evolving assumptions regarding interest-rate risk in light of recent developments in government monetary and fiscal policy and the increase in market prices of many of these bonds, we determined it was prudent to adjust the overall interest rate risk of our securities portfolio and recognize a portion of the gains on these securities. Now let's talk about non-interest expense which increased 33.3% in the second quarter just ended compared to the second quarter of last year.

This large increase was due to a number of factors including the $1.3 million special assessment levied by the FDIC on all insured institutions. $500,000 for higher FDIC base insurance premium assessments applicable to all FDIC insured institutions this year as compared to last year, $1.2 million related to the write-down in the second quarter of 2009 of the carrying value of items of other real estate owned and roughly $500,000 related to the delinquent and current property taxes and legal expenses associated with the transfer to other real estate owned of the collateral securing a previous large credit relationship in Northwest Arkansas. Notwithstanding these items, our second quarter efficiency ratio of 32.1% was our best ever. Of course our net gains on securities sales contributed to that record efficiency ratio.

In our January conference call, we stated our expectation that our efficiency ratio for the full year of 2009 would be at or below our 2008 efficiency ratio of 42.3% and that we would continue our quest to reach a point where we can sustain a sub 40% efficiency ratio. We have had sub 40% efficiency ratios now in each of the past three quarters although there have been unusual items of revenue and expense in those quarters. We think our efficiency ratio in each of the two remaining quarters of 2009 will be close to our 2008 efficiency ratio of 42.3%, perhaps slightly more, perhaps slightly less.

Another of our long-standing and key goals is to maintain good asset quality. Economic conditions nationally have continued to weaken over a number of quarters and this has made our traditional strong focus on credit quality even more important.

Even though most of our markets generally appear to have been less severely impacted by the ongoing recession than many other markets, there is no doubt that the increasing duration and depth of the global and national recession is having negative impacts almost everywhere.

Over the past two years we have dealt with a number of asset quality challenges and we think we have been very successful in working through those issues. During the quarter just ended, there were several asset quality matters worth discussing. Let's start with some ratios.

Our ratio of non-performing loans and leases to total loans and leases at June 30, 2009 was a very favorable 0.90%. That's down 25 basis points from March 31 this year and up 16 basis points from June 30 last year.

Our June 30, 2009 ratio of non-performing assets to total assets was 1.37% which is up 20 basis points from March 31 this year and up 78 basis points from June 30, 2008. 43 basis points, almost one-third of our non-performing assets at June 30, 2009 were due to a large credit in Northwest Arkansas which became the subject of a lawsuit filed against us on May 1 this year.

The lawsuit alleged various theories of liability and sought substantial damages. But as we stated in our most recent Form 10-Q, we consider the allegations of the complaint to be wholly without merit.

When the complaint was filed, our related loans totaled $25.6 million. This was subsequently reduced $2.3 million from the liquidation of deposit accounts and a letter of credit from another bank that partially secured the loans.

We then charged off $10.5 million of the loans, reducing our remaining balance to the $12.8 million net present value of the underlying collateral as determined by recently updated appraisals. The remaining $12.8 million balance was moved to other real estate owned on June 30 when we received title to all of our collateral as part of the settlement of the suit.

The settlement of this lawsuit also resulted in the plaintiffs dismissing with prejudice all claims they had against the company and the other defendant and the company and the other defendants releasing all claims, including any potential claim for a deficiency judgment against the plaintiffs. We concluded that foregoing a deficiency judgment in this matter was in our best interest based on our belief that the potential recovery from a deficiency judgment would not significantly exceed and might even be less than the cost of obtaining and collecting such deficiency judgment.

Prior to the filing of that lawsuit, payments on loans have been made in a timely manner and we had expected the loans to continue to perform. Nonetheless we are glad to have this lawsuit resolved and to have title to all of our collateral for these loans. We are now working to develop an effective plan to sell these assets and maximize our ultimate recovery.

Needless to say, the $10.5 million charge-off on these loans greatly increased our net charge-off ratio for the quarter just ended. We have never before had $10.5 million in net charge-offs for an entire year, much less on one credit.

Because of this unusually large loss, our second-quarter annualized net charge-off ratio was 2.89% compared to 33 basis points in the second quarter last year and 64 basis points in this year's first quarter. In our January conference call we stated that our guidance for 2009 credit losses assumed that economic conditions will deteriorate further in 2009 with national unemployment approaching a 9 to 10% level, that economic conditions would continue to decline throughout the first half of 2009 and perhaps throughout the entire year of 2009 and and that the recovery thereafter would be very slow to develop momentum.

Given these assumptions, we said that we expected 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 materially changed except that we have not factored in the unexpected $10.5 million second-quarter loss.

That loss accounted for 210 basis points of our 289 basis point annualized second-quarter net charge-off ratio and all of our other combined net losses accounted for 79 basis points of our annualized second-quarter net charge-off ratio. Except for this one large credit loss through the first half of the year, we have been roughly in line with our guidance for net charge-offs.

Our 30 day past due ratio which includes past due non-accrual loans and leases was 2.34% at June 30, 2009; an increase from 2.24% at March 31, 2009 and 0.92% at June 30, 2008. In our last conference call we discussed a large credit in North Carolina totaling $8.1 million which was past due and on non-accrual status at March 31.

I will give you an update on that. As you may recall, that credit consisted of two cross collateralized loans with a combined loan-to-cost of 64% and a combined loan to appraised value based on recent reappraisals of 42%. In the April conference call, we reported that our borrower was in negotiations to sell that property.

I am pleased report that sale closed in the second quarter. resulting in the payoff of our principal balance and attorneys fees and approximately one-half of the interests we were owed. We were able to reserve resolve this credit fairly quickly with a positive outcome because of the substantial 36% cash equity in the project and the strong recent appraised value.

We try to focus on quality projects and we strive to get substantial cash equity in most transactions, particularly in larger transactions. The relatively good performance of our loan portfolio is largely attributable to our underwriting principles including our cash equity requirements.

While good collateral and substantial cash equity may not avoid a loan from going past due or even into non-accrual status as was the case with this credit in North Carolina, they do facilitate resolution of problems and they typically minimize any loss exposure. In our July 2008 conference call, we provided extensive details regarding some of our practices for accounting for and structuring loans.

These are practices that we consider to be very sound and conservative. We are not going to repeat all of 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 non-accrual loans and leases and regularly reevaluating the carrying value of foreclosed and repossessed assets, making adjustments as necessary to reduce the carrying value of these assets as appropriate for current market conditions.

Second, we have been very 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. If you have any questions about any of these items, I encourage you to listen to the replay of our July 2008 earnings conference call which is still available on the investor relations section of our website through the end of this month.

While our ratios of non-performing loans and leases, non-performing assets and past due loans continue to be relatively good compared to recent data for the industry as a whole, and I have that data if you would like to hear it, deteriorating economic conditions in recent quarters have impacted our asset quality results. Notwithstanding the moderate deterioration in our asset quality ratios and the unusually large charge-off related to one credit relationship in the quarter just ended, we will repeat what we have been saying for many quarters.

That is that in the coming quarters, we may see one or more or even all of our asset quality ratios increase somewhat farther but we think that any 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 the increase in our provision expense during each of the last five quarters did not prevent us from posting record earnings in each of those five quarters.

During the quarter just ended, we made provisions to our allowance for loan and lease losses totaling $21.1 million which was our largest quarterly provision ever and was $6.7 million more than our net charge-offs for the quarter. This significant reserve building increased our allowance to 2.19% of total loans and leases at June 30, 2009; an increase of 33 basis points from March 31 of this year and an increase of 103 basis points from June 30 last year.

We think this action conservatively provides for the uncertainty resulting from current economic conditions and trends. The unallocated portion of our allowance at June 30 was 20.5% of the total allowances which is just above the midpoint of our 15% to 25% target range.

Let me make one more point that relates to our allowance for loan and lease losses and our current string of five consecutive quarters of records for net income and diluted earnings per common share. Over the last five quarters, we have had some unusual income items including combined $17.1 million of net securities gains and $2.1 million from (inaudible) benefits.

While these unusual income items were unusual, they were the result of wise decisions by our management team. Also over that same five quarters, we have increased our allowance for loan and lease losses by $22.6 million.

That's from 1.06% of total loans and leases at March 31, 2008 to 2.19% of total loans and leases at June 30, 2009. That reserve bill is also unusual but appropriate in light of current economic conditions. Thus over the last five quarters, the $19.2 million of unusual income items has almost offset the $22.6 million increase in our allowance for loan and lease losses over the same period.

Our 2.19% allowance for loan and lease losses ratio was very strong. And we think we are probably approaching the end of the process of increasing our allowance for loan and lease losses for this recession. Our 8.63% tangible common equity ratio was very strong and we would be well capitalized by a wide margin by all applicable regulatory measures even without the TARP preferred stock.

Accordingly, we have no plans to raise new equity. We have no expectations of raising new equity and even if we elect to repay the TARP preferred stock during the next several quarters, we have room to do so without raising new equity.

Also, we think our earnings generation capabilities are very strong as evidenced by our favorable net interest margin and good momentum and service charge mortgage and trust income. All this puts us in a very strong position.

No one can be sure how long the current recession will last but we think we are closer to the end of the recession than the beginning. As we have come through the recession so far, we've increased our reserves substantially.

We have increased our net income and earnings per common share consistently and we have significantly increased our tangible common equity through retained earnings. We have successfully managed through a lot of challenges including higher net charge-offs and more importantly, we have capitalized on the many opportunities that have come from the same economic turmoil and conditions that has caused the challenges. We think that's what a management team should do.

In closing, we have now achieved record net income and diluted earnings per common share in 41 of the last 50 quarters including the last five quarter ins a row. We feel we are in an excellent position to continue that positive trend and that will be our goal.

We acknowledge that we are operating in the most challenging economic environment in decades but with our fine staff, our revenue-generating capabilities, our robust allowance for loan and lease losses, our relatively good asset quality, our substantial capital position, our favorable deposit base and our abundant sources of liquidity; we think we are in an excellent position to continue to effectively manage through the challenges ahead and to capitalize on new opportunities. That concludes my prepared remarks. At this time, we will entertain questions. Let me ask our operator, Sylvia, to once again remind our listeners how to queue in for questions.

(Operator Instructions) Matt Olney.

Hey, you may have mentioned this and I missed it, but did you reiterate your net charge-off guidance of around 70 basis points in 2009?

We did. We said that we believe that that 70 basis points plus or minus is good guidance for the remaining two quarters of the year. That is the guidance we gave in January.

And if you segmented the charge-offs for the first half of the year, of course the majority of them relate to that $10.5 million of net charge-offs and all of the others combined are somewhere I think between 71 and 72 basis points annualized of that net charge-off ratio. So apart from that bump in Northwest Arkansas, we are pretty much on track for where we thought we would be and we've reiterated that guidance at 70 basis points plus or minus for the remaining two quarters.

And as far as Northwest Arkansas, can you give us an idea of your loan exposure up there currently and as well as the allocated provision for that market?

Yes, would be happy to. You know, as we discussed many times, the Fayetteville (inaudible) Rogers Arkansas MSA which for those not in Arkansas, we commonly refer to that as Northwest Arkansas; has been our largest source of problem loans and net charge-offs over the past several years.

We have significantly reduced our total loans and particularly total real estate loans in that market. That number was down to $76 million at June 30 which is less than half of our previous high watermark for total real estate loans in that market. Now with the large charge-off that we took in that market in the past quarter and it was certainly painful, there is a flipside to that and that is that I am pleased to report that many of our remaining loans there are performing very well and are not expected to be a problem.

The other loans which remain in that market that we consider to be currently problems or that may become problems in the future, I am pleased to report have either already been written down to estimated impaired value or already have special reserves established for that estimated potential exposure.

Therefore we believe that our remaining loan portfolio in Northwest Arkansas does not pose any significant risk to future net income results. We think we pretty much with the provisions that we've already got built for loans there, have pretty much got a fence around the total exposure in that market.

Another point that I want to make, while we reduced our exposure in Northwest Arkansas a lot over the last three years, that is and will be a very important market for us in the future. But certainly with the present real estate market conditions there, we have been wise to reduce our total exposure to the current level.

But we think we have put the vast majority if not all of the exposure in Northwest Arkansas behind us and we feel pretty good about that. That one loan was an unceremonious and painful way to end the process of resolving our exposure there. We feel like we pretty much got a fence around it now.

Can you give us a dollar amount of provisions in that market? And also maybe the size of some of your larger loans in that market?

The largest remaining credit relationship up there which is performing and is not past due and current is probably about $15 million plus or minus. I don't know the exact number Matt, but in that range.

It is very real estate related and we have several million dollars of reserves established for it, although it is performing and I expect it will continue to perform. The loan that we resolved into OREO in this last quarter and took the big charge-off on was performing. And interestingly, if that law suit had not erupted and if that loan had continued to perform, it would've had the same impact on our income pretty much in the second quarter that it did because we were already -- before the lawsuit was filed, that loan was approaching renewal.

One of the pieces of it renewed in May and one in June and we had already ordered reappraisals on those properties. It had been two years since they last had been renewed and looked at from a valuation perspective.

So we would have established a special reserve for those loans even as performing loans equal to the difference in the value of the loans and the reappraisal value which would've been the exact same amount we actually ended up charging off when they went into non-accrual status. That's the way we do our loans as these loans come up and renew that are in stressed or troubled markets.

We look at them and if there is a difference, even if they continue to perform, if there's a difference between the loan balance and the value of the underlying collateral, we will typically establish a special reserve for that loan. So we think that's a very conservative practice to do that for loans that are performing and not showing any problems with payment history on them.

Great, thank you George.

All right thank you.

Andy Stapp.

Good morning. I may have missed this, but your [reserve coverage] loans increased 33 bips linked quarter versus your guidance of 10 to 20 basis points. Just wonder why they had a stronger reserve build?

It is our conservative philosophy. We want to be very, very conservatively reserved for the -- what I would say would be the worst case sort of scenarios that could occur. And we also want very much to put this reserve building behind us.

And as I said in my prepared remarks, we think if we're not at the end of reserve building, we are very near (multiple speakers) that and unless the economy takes a sharp downturn, we would expect to see a significant reduction in our provision expense in the coming quarters. Our 70 basis points plus or minus guidance implies roughly 3 to $4 million a quarter in net charge-off, something in the 3.5 million plus or minus range.

And allowing for some growth in the portfolio, we would expect our provision expense in subsequent quarters to do no more than cover the growth and provide for the actual charge-offs in that most likely. So we think that if we are where we think we are, that our normalized provision expense over the next couple of quarters would look to be 4 to $5 million a quarter versus 3 to $4 million in charge-offs a quarter.

Okay, so was it -- the stronger-than-expected reserve build wasn't a result of asset quality deterioration over the course of the quarter or subsequent to the 8-K, I should say.

No, nothing has caused us to revise our guidance. Certainly we took a big gash in Q2 on that unexpected hit but our expectations continue to be very similar to our other experience over the first two quarters.

Okay (multiple speakers)

Andy, I will tell you I'm a credit guy and as a credit guy in a recession, credit guys like more reserve rather than less. We want to get to the end of that reserve building and I think we are there or very close.

Good. I'll be glad when we get to that point too.

You had strong growth in interest-bearing transactions accounts. Was that just taking market share? Did you have some type of promotion going on? If you could just give us some color on that.

We didn't have any sort of promotion going on other than just our normal hard work of going out and doing one-on-one business development in growing accounts. And certainly as you can see from the significant decline in our cost of interest-bearing liabilities, we weren't paying up to attract any money.

So it's just a -- it's a fundamental improvement in the quality of our deposit base and really that trend has been ongoing for a number of quarters now and it's unfortunate that a very positive and very important long-term trend like that has gotten obscured by the fact that everybody wants to talk about provision and asset quality. And we've tried very hard to address the asset quality challenges that we have encountered over the last couple of years and at the same time to keep an equal focus on our ability to really make some fundamental good improvements in our business and grow new relationships and grow new customers.

And that improvement in our deposit base over the last year is I think a strong indication of the fundamental improvement in our franchise that we have been able to accomplish at the same time that we are addressing the challenges that everybody is having to address because of the economy.

Okay and you touched on the one loan in North Carolina that you are able to resolve. Can you provide some additional color on what you are seeing in the Carolinas?

Yes, we are actually seeing some good new business opportunities in the Carolinas. We booked a couple of new credits over there in the quarter and our total loans in the Carolinas actually went up a touch and -- let's see if I can give you that.

I think that they are approaching high 5% to 6% of loans. I think they are up roughly a percentage point from where they were a quarter ago and at the same time with the resolution of that problem, our total non-performing assets in the Carolinas have dropped to about $3.7 million which is down quite a bit from where it was.

Unemployment continues to be very high in the Carolinas. I think it's bouncing around in the 11% range in both North Carolina and South Carolina and we consider it a challenged market, a stressed market because of that high unemployment over there. But at the same time, we have found in the last quarter of couple of really, really good business opportunities there and we are pleased to take advantage of those.

So our volume is up there. We found some good opportunities there and our volume of problem assets sharply reduced there as a result of payoff of that loan and the sale of several other pieces of OREO that we had smaller credits that we've liquidated successfully in the quarter.

And the loan growth you've got in the Carolinas, is that stuff that was previously financed by the CMBS market?

One really -- the most significant piece of it, yes, was. We are working on and I don't know whether we'll get the deal and get it closed or not, but we're working on another similar piece of business over there that's also coming back from CMBS land.

I have some other questions but I'll get off and let some other people on.

[Leo Harman].

You talked a little bit about trying to get to the end of the reserves [build] process. Can you give us some indication of what signals that for you whether or not you need to see two consecutive quarters of declining non-performing assets? How do you get to that level where you know you are at that -- into that reserve [build]?

It probably won't be something that objectively, statistically you can look at our numbers and put your teeth in because as I shared in my response to Matt Olney's question, we are looking way beyond what's on non-accrual or non-performing or past due at any point in time and we are looking at performing assets that as they renew or show some deterioration in credit quality, we are looking at those and establishing special reserves, special reserve allocations for even performing credits way down the road.

So you know, I think since we are so forward-looking and out there in front on asset quality issues as far as the way we establish and maintain our allowance for loan and lease losses, that number probably peaks, could peek before you get to the point that non-accrual loans would peak. And I'm not saying that I think necessarily non-accrual loans are going up. They may certainly.

They may not. But I think when we get to the point where as we are looking way forward, we are seeing a significant diminution in the quantity of things that we are setting up special reserves for, that's where the reserve peaks and starts coming down. I think we are very near if not at that point.

There will be some more loans out there that we will have that will go non-accrual. That's undoubtable until the economy turns around and it will even take a little while afterwards for all that.

You'll see some more things going on non-accrual. The flipside of that is we're doing a very good job of pushing stuff out the other end and liquidating non-accrual assets and selling OREO and repo. We're moving a lot of that product out and moving it fairly quickly at fairly decent prices.

But what will actually stop the increase in our reserve bill is when we feel like we have looked at everything that has risk to it due to deteriorating economic conditions and we've established a reserve for it and the vast majority -- almost none of our reserves, almost none of them are for non-accrual assets because almost every non-accrual asset has already been written down to FAS 114 impaired value. There's less than $0.5 million probably of reserves that actually stand for non-accrual assets because they have already been written down.

Our reserves are for everything else. And that just reflects the fact that we are extremely forward-looking way out in front of things becoming non-accrual and establishing reserves for assets way down the road. And my guess is that a large chunk of those reserves will never be needed because assets that are in markets where real estate prices have depreciated rapidly but the asset is still performing, those markets will recover and normalize and those values will come back and those assets will continue to perform. In some cases whether or not the asset values come back in future periods, if that is the case, we won't need those reserves.

And then the second question has to do with loan repricing. What are you all seeing relative to rolloff in loans versus new loans coming on the books from a repricing standpoint?

We are seeing those loan yields be relatively stable as evidenced by the fact that our yield on loans in the second quarter versus our cost of interest-bearing deposits one quarter improved 30 basis points. From Q1 to Q2, our spread between our yield on loans and our cost of interest-bearing deposits went from 442 to 472 and certainly loans that were priced at very low margins and more aggressive times in the past, as those loans are renewing, maturing or paying off; we're getting an opportunity to either reprice or renew those loans at better relative rates or redeploy that money in new loans at better relative rates.

Now a 6.25 loan may roll off and get replaced with a new 6.25 loan but that 6.25 loan may have been originated when prime was 6.25. And now with prime at 3.25, obviously that's a much better relative rate.

So that is where the real improvement in our net interest margin has come from over the last year is the significant improvement between our spread on loans and deposit costs. A lot has been made of the fact that our margin got bumped in a particular quarter here and there because of our securities portfolio and our trued investments there that were bought at really favorable prices that had really good yields and certainly that helped our margin a lot in earlier quarters.

But as those things have diminished in quantity and impact on our margin, our margin has continued to improve just through the basic fundamental improvement in our spread between loans and deposits. And that's why we can reiterate in this call that we think 480 plus or minus is a good indication of where our margin should be in Q3 and Q4 this year.

And can you talk a little bit about the mix of those loans coming on relative to fixed versus float and how that has changed over the last six months or so?

It has not changed much. We have had a very slight shift in the percentage to fixed-rate loans but it is still very slight. Actually I take that back.

I'm looking at -- I pulled it out and (inaudible) page here and I haven't looked at this yet. But at June 30, 53.9% of our loans were variable late rate loans. So that's actually up 170 basis points from March 31. At March 31 that trend was going the other way less than 1% or so. So you it's not been much change over the last six months and we're still running basically -- 53.9% of the total portfolio is variable.

Thank you.

[Joe Stiben].

All my questions have been essentially answered but can you address -- obviously now that you have this settlement on the lawsuit and you've got control of the collateral, how long is it -- how long do you think it'll take you to sort of work out of that situation?

Joe, I'll tell you what. That is a great question and there are two ways we can approach this. And one is we have written the properties down pretty aggressively. When we ordered the appraisals, we asked the appraisers to look at it two ways. My understanding is -- I didn't it actually order the appraisals-- but I'm told that we were asked to look at them on a standard development appraisal of the discounted net present value of future sales proceeds with an entrepreneurial profit margin built in and all the sales costs and asked to look at it on a bulk liquidation value basis.

And my understanding -- again I've not read the appraisals personally. But my understanding is the appraisals address that and we wrote the assets down to the lower of those two values. So we have got the assets on our books at a very low price.

Now honestly, I don't know if there's a buyer that I could bulk sell 695 lots to up there at this time. But the valuations are predicated upon that kind of a [QuickBook] sale. But honestly I don't think that's in the best interest of our shareholders.

We have got lemon up there and I think we can make some lemonade. If we sell those developments out in an orderly manner utilizing our real estate management resources that exist within our company, I believe we can sell those assets which are currently on our books for $12.8 million for possibly as much as 25, $30 million or even more.

And in support of that, we haven't even developed a marketing plan yet. Our guys up there just getting control of everything and getting everything lined out and they're meeting up there on Thursday of this week. But on the Waterford property, I've already got a contract unsolicited for a buyer who is -- we're not financing it -- who has signed a contract to buy six lots at $56,250 a lot. So that's about I think 337.5, something like that.

And the prior developer up there hasn't sold any lot since last year in that particular subdivision. So -- and we've got several other interested parties. So putting -- put that in comparison, even if you ignore the commercial track that's associated with Waterford, even if you only ignore the clubhouse that we own and will probably sell to the POA at some point in time when they get enough members to do that, if you ignore the value of that, we are in those lots at $41,000 a lot and these lots are probably -- they're not the biggest best lots, they're not the worst lots. They're probably typical toward the middle.

So we are selling them for 56 and ignoring the commercial lot and the clubhouse value which would be a couple million dollars in the deal. That is $25,000 plus a lot more than where we are in them at. So my inclination is to think what we'll do is because these really are valuable properties and they are very viable to be developed, I think what we'll do is probably sell these out, account for them on a cost recovery basis, sell them one lots or six lots or 10 lots at a time to retail buyers or builder end users of the lots.

And my guess is that three, four years from now we will have the value of those subdivisions down to basically a dollar on our books and we will have liquidated about half of the collateral and totally recouped the $12.8 million in book value we have now and that in the ensuing three to four years, we will sell an equal or greater value of lots and every lot we sell will be net income when we do that. So we haven't made a final decision but I think there's a lot of value there and I think we can recapture it and I think I can ultimately recover my entire charge-off on this credit and more if I worked through this in a reasonably orderly manner and make a heck of a good return for shareholders in the process.

Kevin Reynolds.

Good morning George. Good quarter.

Good morning. Thank you sir.

A couple of questions and maybe you've addressed and we can -- I apologize if I'm asking you to repeat yourself. But I wanted you to go back to when you said you sense that you're closer to the end of this recession than the beginning.

What signs are you looking at out there that give you that comfort? And is it, I guess more importantly, is it -- are you seeing the same signs uniformly across your different markets -- Texas, Arkansas, North Carolina -- or are some firming up sooner than others and that sort of thing?

Well, we are seeing continued activity in sales from our really proven builders who have proven that they can function and function profitably in this economy. So the guys that have kept building and kept selling and have been profitable and nicely profitable in the process seem to be gaining a little velocity and certainly that is true on the lower end of the home spectrum where the $8000 tax credit has a disproportionately large impact.

So we are seeing quite a bit of activity there. We have seen -- and I've talked about this in our conference call last quarter -- an acceleration in the sales of our other real estate owned after a very paltry number of sales and I don't remember the details now. But in January and February, it was very slow. In March it accelerated, in April accelerated further.

And we are having people regularly and actively buying OREO properties from us and there seems to be a little bit of energy and activity out there about that. Certainly the growing mortgage revenue trend and the increasing percentage of our mortgage volume from Q1 to Q2 associated with new home purchases is very positive.

The service charge income swing from Q1 to Q2 -- and you know, how service charge income is recognized for us depends a whole lot on how the days of the week and the days of the month lay out on the calendar. And the first quarter was about as good of a layout of days of the week and days of the month as you could get in the first quarter and we were down 2.4% compared to the first quarter last year just because there was just a real absence of economic activity in our markets in Q1.

But in Q2 even though it didn't lay out as well as Q2 of last year did on the calendar, we were up 2.7% from last year. So that service charge activity implies to us that people are pulling out their debit cards, they are pulling out their checkbook, they're back in the stores. It's certainly not a boom but I think we are seeing things get a little bit better.

And you know, the other thing I would point out to you in response to that question and I have talked about this all the time in general terms and saying our markets are better than the national markets on average, but if you look at Arkansas unemployment rate -- I don't think I have June's data. But in May when the national unemployment rate was 9.4% seasonally adjusted and it's now 9.5%, Arkansas was 7% and both the Dallas-Fort Worth, MSA and the State of Texas as a whole were 7.1%.

So you know, Texas was 230 basis points below the national unemployment rate in May, Arkansas was 240 basis points below the national unemployment rate. The Brookings Institute did a study of the 100 largest MSAs in the country in the first quarter.

Dallas was the fifth strongest US metropolitan economy in Q1 of this year according to the Brookings Institute. Little Rock was the seventh strongest out of 100 largest and I believe Austin, Houston and San Antonio were also all in the top 10.

So the majority of our exposure of our company is in Arkansas and Texas and Little Rock, of course the biggest piece here in Arkansas. So those are very good indications that the Dallas economy according to a local market monitor and national real estate forecaster was the third-best large market in the US for home prices over the next 12 months.

Little Rock is the sixth best large market in the US over the next 12 months for home prices according to that survey and Fort Smith, Arkansas; and Texarkana, Arkansas where we also have strong presence, we're in the top 10 small markets over the next 12 months according to that survey. Even in our stressed markets in Benton County, in Washington County in Northwest Arkansas; Benton County's home sales were up 0.6% of in May of 2009 versus May of 2008 and Washington County had the exact same number of home sales in May of '09 versus May of '08.

So you know, it appears to me in our markets that the economic decline is significantly arrested and we may not be back in any sort of boom, but it appears that things have stabilized at kind of where they were and where they have been and I sense a little bit of positive activity there.

Okay, a couple of other questions. One -- maybe just a quick answer. The large Northwest Arkansas loan that's subject to -- that was the subject of legal proceedings, you've got that, it has moved as I understand roughly what $12.5 million into foreclosed properties?

Yes, $12.8 million.

So if you stripped that one piece out and just looked at the combined balance on an apples to apples comparison Q1 versus Q2 of non-performers and ORE, that cumulative balance actually declined, again excluding the Northwest Arkansas loan. Is that correct?

Yes, the Northwest Arkansas loan accounted for 43 basis points of our 137 basis points of non-performing assets.

Okay, so with that and sort of signs that the markets might be -- at least the free fall is over and maybe things are firming and could get better. It's clear -- I mean it's evident that you don't need the TARP capital.

You said you don't need to raise capital to redeem it. Is there -- or do you feel more comfortable today perhaps moving down the path of repaying TARP to get the government out of your business or do you see something maybe perhaps a little more tangible in the FDIC pipeline that might cause you to want to hold onto that a little bit longer?

That's a good question and I don't know how that all plays out. What I know is that our board looked at repaying the TARP in April. The decision that our board made by an eight to three vote was to not repay it at that time, to look at it again probably in the September/October board meeting and then in the interim to see if FDIC failed bank opportunities came along that were so compelling that it would dictate that we keep the capital for a period of time and repay it later rather than sooner.

If nothing compelling has come along by September or October, my sense is that our Board of Directors will reconsider the issue and my guess is -- and I'm guessing at this. I don't know for sure because the directors haven't told me this man for man or woman for women, but my guess is they'll probably elect to go ahead and repay it if we don't have some really good use for it.

And if we don't have a lot of organic growth by then at the rate that our tangible common equity ratio has been growing in recent quarters, they may say the heck with it. We still have got plenty of capital anyway even if we do buy something. Let's repay it.

I think the leaning is that way but it's premature for me to tell you what the answer is because the board will make that decision at its meeting in September or October.

Okay, fair enough. Another way though I guess to answer the question is -- maybe this isn't going too far out on a limb. You and your board do not believe that -- are not holding onto the TARP capital because of an abundance of caution or fear with respect to the evolution of your credit quality?

No. The board's belief in my opinion is that we may to -- that we may have the chance to utilize that capital to make a very profitable acquisition. And if we do, it would be nice to have as temporary capital and if we don't, I think the inclination is to pay it back.

Okay, thank you very much.

And to follow on, I guess if we were holding onto the TARP capital because we thought we were going to need it for significant asset quality problems, that would certainly be inconsistent with the guidance that I gave that I think we're very near the end if not at the end of our reserve building phase.

Dave Bishop.

Hey, sort of circling back to the CMBS market there, I don't know if it's possible to sort of compare and contrast what sort of terms and conditions you're getting on those types of credits there relative to what they maybe previously had been underwritten at?

Well we closed one large credit, as I say, in North Carolina and probably the best indication is the borrower brought $7 million to the closing table to cover the difference between our loan and the loan that was on the property in the CMBS land.

So certainly a lot of stuff was done at very high appraised values in CMBS land at the height of the market and a lot of those projects are very good projects. But the same type of financing is not available today.

So as that stuff moves out of CMBS land, we've seen a lot of situations where people are having to bring checks to the closing table to bridge the difference between the loan they had and the loan they can get now even on really good, really high-quality, really high performing properties because things aren't appraising for what they appraised for a couple of years ago.

And in terms of the overall commercial real estate market especially as it pertains to strip centers and retail centers there, as you sort of approach maybe the (inaudible) lands, some of the strip centers associated with newer developments there as opposed to some of the more stabilized urban markets you are in, what signs of stress are you seeing I guess in terms of that asset class?

I will tell you that I don't think we have got much exposure in the CRE part of our book of business. That's not to say we won't have loans go past due on our non-accrual and we won't end up with a piece of OREO here and there. But I don't think we have much loss exposure in the CRE book of business at all.

I know there's a lot of dialogue going on out there in the industry and in the media that commercial real estate is the next shoe to drop following the construction and development books of business. And we have roughly equal sized books of construction development and CRE lending, not exactly, but similar sized pieces of it.

And our view is that our CRE book with the leases that are in place and the pre-leasing requirements and the significant equity in those deals and the strength of our borrowers for the most part is not going to be a significant problem. But I don't think we're going to work through near the volume of challenged CRE credits that we have worked through in the construction and development book.

Thanks, most of my other questions have been answered. Thanks George.

Thank you.

Jordan Hymowitz.

Hey George, couple of questions. First of all there's been a lot of talk on interest accrual and I think starting this quarter you have to quantify exposure there. Can you get very high down payments? And from what I understand, there's very little that's actually on interest accrual. Can you quantify that a little bit?

Jordan, I'm not sure that I can quantify it. What I will tell you and I will reiterate what I said in the prepared remarks and that is that we are very quick to put things on non-accrual when we believe there's significant doubt about the collectibility of that interest and we don't wait typically until the loan is 90 days past due to put it on non-accrual.

If it's something that we believe is going to get 90 days past due, we will do it at 30 days or 35 days or 40 days or 50 days, wherever we identify it as being an emerging problem that because of the prospects for future payment we expect to be on non-accrual. So I'm not familiar personally with what you are talking about there but a higher scrutiny of our quantification of non-accrual amounts would not have a significant effect on us, I don't think.

You know. the other thing we do is we try to get interest paid monthly on the vast majority of our loans. On smaller credits, we have some [bullet] loans and so forth. But the vast majority of our loans are paying interest monthly and if not monthly, quarterly. So we don't have huge amounts of accrued interest typically develop on the loans of any size.

Do you know the balance number? Are you familiar with -- I thought a new FASB was requiring you had to disclose that number this quarter or next.

You are going to send me to the FASB literature which I so dearly love to read to figure that out. Because I'm not aware of what you are describing. I apologize. I hate to show my ignorance on that.

Okay, next question is there's a new law tentatively set to go through Congress that would allow Arkansas to raise the auto loan rate. You do very little auto loans now. Would this be something you would be interested in if that went through?

It has no effect on us whatsoever. The section, I think it's 731, of the Gramm-Leach-Bliley Act basically allows any bank headquartered in Arkansas to charge the same rate on any loan as any other bank operating in Arkansas where the branch could charge in their home state.

We've got banks in Arkansas from eight, 10, 12 different states operating here that have branches here and we can pick and choose as an FDIC insured financial institution from the highest rates that any of those banks could charge on any loan. So as a result of that Arkansas, which for decades but probably the most restrictive usary law in the nation, now has one of the most liberal in the nation since -- for banks, for FDIC insured institutions because they can pick and choose from the laws of a vast number of states and apply them to different types of transactions, whatever state's law is most favorable.

Now that only -- that Gramm-Leach-Bliley override only applies to FDIC insured financial institutions. So it's been a real rub for the non-bank lenders in Arkansas who are constrained at 5% over the primary credit rate.

So those guys are stuck now at -- what would that be? 6% I guess as a maximum rate. So that has been -- for non-bank lenders, it's been a real issue and the same sort of override is contained in Gramm-Leach-Bliley which is predicated upon the federal government having a federal interest in a state law matter.

The usury law is really dependent upon the nexus of an FDIC insured, federally insured bank. So the auto dealers and others have not been able to extend that usury law to their case but a broader national usury law based on the commerce clause might apply. It has no effect on us.

Final question is can you just state the balance (inaudible) in the Q between Texas, Arkansas and North Carolina and the NPAs associated with those three states, those three regions I guess?

Yes, you want our loan balances by state and so forth?

Yes and the NPAs by state, yes.

Okay, yes I can give you that if I can put my hand on the right piece of paper. Let me give you the NPAs first.

Total non-performing assets for Arkansas are $32.4 million. Total non-performing assets in North Carolina are $1.8 million. Total non-performing assets in South Carolina which we also service out of that North Carolina office are $1.9 million.

Total Texas NPAs are $3 million and all other states are $1.5 million. And of that $1.5 million, $1 million of it is in Mississippi and relates to three grocery stores that we have on non-accrual status there for a large Arkansas food cooperative wholesale food cooperative that also had a retail subsidiary that we financed some grocery stores for and they went bankrupt in the last quarter and we took over those assets.

The good news is I understand that they have those assets through the bankruptcy court settled and will be getting a full payoff on those hopefully within the next few weeks. So the NPAs, very little in Texas. North Carolina and South Carolina have kind of fallen back in line with the proportion of our business out of the Carolinas and Arkansas.

Mostly Northwest Arkansas accounts for the majority of it. Now let me see if I can find you the breakdown which I had just a minute ago of loans. Yes, here it is.

Texas is -- and these are loans originated by our offices in Texas wherever they are. It's not the geographic breakdown of the loans but it's what offices have originated them.

Our Texas offices have originated 31.8% of our total loan book. North Carolina, it looks like it's 5.9% and Arkansas is 62.3%. On the deposit front, our Texas offices have originated 12.1% of deposits and our Arkansas offices have originated 89.9% of our deposits. Does that answer it, Jordan?

Thank you very much.

Thank you. Have a great day.

Peyton Green.

Yes, George, I was just wondering if you could outline maybe what opportunities exist going forward compared to what was presented to you last year at this time (inaudible) really in the first half of last year where you were able to build earning power significantly and I guess it might be more acquisition oriented at this point in Ozarks life versus past times where you really benefited from mining market share organically. I was wondering if you could comment maybe what your potential scale is in that kind of an opportunity and where it might be?

Well, you know, I think obviously -- I think the number one and number two opportunities for loan growth right now are to take away business from competitors who may not be at their very best and there's certainly a lot of guys that are pretty beat up out there; and number two, to pick up business that is coming back and will have to come back as long as loans mature from the commercial mortgage-backed securities land and a lot of stuff will never come back from CMBS land because it was done on such (technical difficulty) terms and at such high leverage (technical difficulty) when it balloons, the owners of the property (technical difficulty) servicer of the CMBS pools, the keys to it say it's yours, it's non-recourse, you can have it.

On the other hand, there are a lot of loans out there, a lot of properties that are very good properties that were financing in CMBS land that got exceedingly favorable interest rates and exceedingly liberal terms and are non-recourse and even though like in the case of the one I was describing on the phone, the borrower has got to come up with a bunch of cash, it's worth it and that is an asset the borrower definitely wants to keep because of it's a high quality, high-performing asset.

I think our growth opportunities in loans, until the economy gets better, are going to come from takeaway business from competitors which we are seeing CMBS refinance opportunities which we are seeing. And then as the economy gets better, I think organic growth will return to the loan portfolio.

But right now, the organic stuff we can originate is just barely or not even quite barely keeping pace with the normal paydowns in the portfolio. On the deposit side, certainly we have seen a lot of deposit opportunities at very reasonable pricing and I think that continues for quite a while. The strength of our capital position, the strength of our earnings have made us a safety and sound bank for retail customers. Locally they realize we're going to be here.

They're not so sure about some other folks. And as a result, we have had a flight to quality of deposit customers coming to our bank because of our strong financial position. And you know, I think we will see organic deposit growth apart from that again when the economy gets better.

Now I would still tell you that our view is that organic growth is the principal growth vehicle for our company in the future and that acquisitions will continue to be a secondary focus and that will be the case. Now the secondary focus of acquisitions is certainly a lot more probable today than it was a year or two or even five years ago.

Basically less than 5% of our company has been bought and 95% plus or 96, 97%, something like that has been built. We're not a big acquirer but there is considerable likelihood -- and I don't know whether that's 10% or 20 or 50, but there is a higher likelihood than historically that we will find an opportunity to do an FDIC failed bank transaction that will be very advantageous for shareholders. And if that happens, we will certainly pursue it.

Okay and I guess on that front, so far it seems like the FDIC has been getting these loss share agreements on some pretty damaged properties that have questionable franchise value. I mean, what does a situation like that have to look like for your interest to be more significant I guess?

Certainly a franchise of dubious value with nothing but massive problems is not appealing to us. I'm not going to go through the specific criteria publicly of what we're looking for.

But I will say it would be a transaction structured where there was little risk and significant longer-term franchise value that we felt like we could really parlay into great value in the future or we won't do it because it's going to be a lot of work and if it's not going to be significantly beneficial to our shareholders -- and I'm going to stay here and do what we do every day and that's try to build new customers in our local markets and expand our business the way we have expanded it for 14 years now by pursuing very effectively our growth in de novo branching strategy.

Okay and I guess would the focus be North Carolina, Arkansas, and Texas or are you willing to go to other places?

Well that would be the focus unless a really nice little franchise in another state that we would ultimately like to be in came available and a compelling transaction. Our view basically is that Arkansas, Texas and the Carolinas are the focus of our franchise for the next decade but there are states that we would like to be in in 10 years, 20 years, 30 years as we evolve the franchise; and if in that longer-term more regional banks sort of concept, that geography, if an acquisition was presented to us by the FDIC, and we are looking at them all the time, if an acquisition was presented to us that we thought met our criteria, we would look at our one of these other states. But we would have a preference for the Carolinas, Arkansas or Texas but there are half dozen other states we would look at as well.

Okay and then I guess, George, one other thing. What do you feel like your exposure is based on all the wrangling in Washington about the deposit fee issue and the ASFOD side on the consumer front?

I don't spend a lot of time -- I don't spend any time reading proposed legislation. I glance at summaries and stuff, but I don't look at that.

The world is constantly changing and stuff is constantly being proposed in Washington that happens or doesn't happen. As it gets close to happening or happens, we start dealing with it. But I learned a long time ago that I would spend all of my time and wasted energy phantom shadowboxing deals from Washington that never happen.

So I barely have enough time to deal with all the stuff that Washington actually passes, much less deal with all the stuff that's proposed that never gets out of there. We haven't spent a lot of time analyzing it.

Certainly things are proposed that will make the industry less profitable in some respects. All of those things -- similar changes have happened in the past and people adapt. When I bought the bank a little over 30 years ago, I bought the bank from a guy who was convinced that the banking industry was doomed by the elimination of Reg Q which was pending and proposed then and banks were going to be able to pay a market rate for deposits.

And he was convinced that the industry was going to hell in a handbasket because of the elimination of Reg Q. He sold me is dearly beloved bank because he thought he was tossing this hand grenade to this kid who didn't know any better.

And my premise was then the industry will adapt, just interest costs will go up but the industry will adapt. And we have seen hundreds of changes since then and the industry adapts and adjusts and you offset lost revenue with other revenue (inaudible) cases and the industry is still going to make money. It will adapt to whatever Washington throws at it.

Good deal. Thank you very much.

Andy Stapp.

All right Andy.

Hey, got some softball ones for you, just more homework type stuff. Construction -- what construction development loans comprised total loans at quarter end?

That's a great question Andy. I don't think I have that data at my fingertips here. I apologize, Paul, do you have that? (multiple speakers) Paul Moore has that answer.

At June 30. total construction and land development loans were -- Andy, I want to check this number. I'm going to give it to you but I'm going to tell you it's a preliminary number and I [about] personally [vetted] it and this is the first time I have seen it. We are $618 million which was 31% of the portfolio and that is down from $691 million which was 34.7% of the portfolio at March 31. So that is a 3.7% swing.

Right.

I can mentally tick off a couple of credits that we booked and some paydowns that occurred that account for two-something-percent of that change. But the rest of it, if it's legit, must be a bunch of small deals.

The non-farm, non-residential, the CRE part of the book went to $638 million from $549 million. So that went up from 27.6% to 32%.

That's a 4.4% increase and we did book some excellent pieces of new business in that category. But let me give you those numbers and tell you their preliminary and you may want to check the Q because there may be -- it wouldn't surprise me if they are in a loan or two in there that's miscoded. But I will personally pull that check because those numbers look a little strong in the swing between those two categories this quarter and that's the first I've seen that data.

Okay and I don't know if I missed this, but how much did the Northwest Arkansas charge-off impact the margin?

It was approximately $400,000 of interest that we didn't collect on that. Now one of those deals was monthly pay and one of them was quarterly pay and of course they were both approaching past-due status or were 10 or 15 days, 10 or 12 days past due when the lawsuit was filed but I think we wrote off about $400,000 of interest on those two.

The flipside of that is the asset in North Carolina that we resolved through sale that was on non-accrual at March 31, we picked up about $240,000 of interest on that. We collected half to get that bill closed at the last minute.

The buyer and the seller had a contract and the buyer -- the seller couldn't come up with any more money and the buyer wouldn't move on his contract and we were at the closing table, and to make it work I had to make the decision to write off half of our interest. But since I didn't have it accrued anyway, I didn't feel terribly bad about that and was glad to get rid of the big non-performer. So we did pick that up. So net net, there was probably about $200,000 net interest between those two deals to the negative.

Lastly, what do you expect for the effective tax rate for the balance of the year?

Paul is saying pretty much the same (multiple speakers) may increase just a touch as a result of selling off some average balance in municipal bonds being lower in future quarters than it's been in the prior quarters. But pretty much the same range, up a little.

Okay, thank you.

Matt Olney.

Hey, George, do you have the current duration on that securities portfolio? And what are the expectations for additional fill in that portfolio given you still have some unrealized gains in there?

The average life of the portfolio at June 30 was 6.3 years and the modified duration was just under 4.5 years at June 30. Again, I will tell you we have not sold anything so far this quarter and I really can't add anything to what I said in the call and that is that we will be a buyer when we think it's prudent to buy. We will be a seller when we think it's prudent to sell.

That's going to depend on economic conditions, credit market conditions, our assumptions about interest rate risk and various other factors. So we don't have any predisposed plan either way on that going forward. So, your guess is as good as mine.

But as far as that duration of about 4.5 years, you're comfortable with that near-term given what you see out there?

We made the adjustments that we felt like we need to make to balance our interest rate risk models and get them back within parameters under the scenarios that we have been looking at them under. We have done what we needed to do to get within our target parameters so far. As assumptions change and economic conditions change and so forth, that could dictate either purchases or sales in the portfolio.

I'm showing no further questions at this time. Are there any closing remarks?

Thank you very much. There being no further questions, that concludes our call. We look forward to talking with you guys in about 90 days. Thank you very much.

Ladies and gentlemen, this concludes the Bank of the Ozarks second-quarter earnings release conference call. You may now disconnect.