Bank OZK (OZK) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the Bank of the Ozarks Incorporated Fourth Quarter and Full Year 2014 Earnings Release Conference Call. My name is Joe, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session. Please note that this conference is also being recorded. I'd now like to turn the call over to Ms. Susan Blair. Ms. Blair, you may begin.

Good morning. I am Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company’s results for the quarter and year just ended and our outlook for upcoming quarters. Our goal is to make this call as useful as possible to you in understanding our recent operating results and outlook for the future. You will note that we revised our format for today's call. We hope you'll find it helpful. Additionally a transcript of today's call including our prepared remarks and the Q&A will be posted on bankoftheozarks.com under the Investor Relations tab. During today's call and another disclosures and presentations, we may make certain forward looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic, real estate market, competitive, credit market and interest rate conditions, revenue growth, net income and earnings per share, net interest margin, net interest income, non-interest income including service charge income, mortgage lending income, trust income, other income from purchased loans and gains on sales of foreclosed assets, non-interest expense, our efficiency ratio, asset quality and our various asset quality ratios, our expectations for net charge-offs and our net charge-off ratios, our allowance for loan and lease losses; loans, lease, and deposit growth, including growth in our non-purchase loan and lease portfolio; growth from unfunded closed loans; and growth in earning assets, changes in expected cash flows of our purchased loan portfolio; changes in the value and volume of our securities portfolio; the impact from termination of the loss share agreement, conversion of our core banking software and expected cost saved in connections with such conversions, the opening, relocating and closing of banking offices; our expectations regarding recent mergers and acquisitions and our goals for additional mergers and acquisitions in the future; changes in growth in our staff and expenses with regard to regulatory compliance. You should understand that our actual results may differ materially from those projected in the forward-looking statements, due to a number of risks and uncertainties, some of which we will point out during the course of this call. For a list of certain risks associated with our business, you should also refer to the Forward-Looking Information 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. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings press release. Our first presenter today is Chief Financial Officer, Greg McKinney, followed by Chief Operating Officer, Tyler Vance and Chief Executive Officer, George Gleason.

Our excellent fourth quarter result provided a great end to an eventful and productive 2014. Our 2014 results included record net income of $118.6 million, record diluted earnings per common share of $1.52, record net interest income, record service charge income, record trust income, and record growth in funded loans and leases, unfunded loans, deposits and total assets. Acquisitions were an important part of our story in 2014. Our omni-based acquisition which closed in March 2014 had a strategically significant offices and staff in Houston, Austin and San Antonio Texas. We consider these to be some of the best markets in the country. That transaction also gave us valuable expertise in SBA lending. Our Summit acquisition which closed in May 2014, was our largest acquisition at that time. It brought our company a talented banking team, expertise and consumer, timber and poultry lending, a strong presence in four new Arkansas markets, and a total combination of our office locations, teams and market share and five other Arkansas markets. Our pending acquisition of Intervest which we announced in July of 2014, should be larger than any of our previous acquisitions. Intervest has offices in New York and Florida which in regard to both locations, and customer served are very complimentary to our existing offices and operations in those states. This transaction is expected to close less than a month from now on or around February 10th. While we are very pleased with each of these strategic acquisitions, we are even more pleased with the excellent organic loan and lease growth we achieved in 2014. Our outstanding balance of loans and leases excluding loans acquired in acquisitions grew a record $1.35 billion in 2014 to $3.98 billion at year end. Our unfunded balance of loans already closed grew a record $1.75 billion in 2014 more than doubling down the year to $2.96 billion at year end.

On the deposit side we have long expected debt within reasonable limits. We could accelerate deposit growth essentially as needed to fund our loan and lease growth. That worked out largely as planned in 2014 as we accelerated deposit growth in a very efficient manner and approximately 25 spin-off offices to fund the record loan in lease growth that Greg just described. You can see this on our $357 million of deposit growth in the quarter just ended when of course we had no acquisitions. More importantly, excluding accounts acquired in our 2014 acquisitions, we achieved record growth in 2014 in our number of net new core checking accounts with approximately 9,370 net new accounts added. This record core account growth along with our acquisitions, contributed to our record annual service charge income in 2014. Even as we achieved substantial deposit growth, our favorable cost of interest bearing deposits contributed to our superb net interest margin of 5.53% for the fourth quarter and 5.52% for the full year of 2014. 2014 was a very important year for us, more so than just for our stellar financial results and excellent growth, we successfully implemented the biggest technology advancements our company has made in the past 30 years. Laying a foundation it should serve us well for years to come. Earlier in the year we completed an extensive RFP process which resulted in our decision to convert our core operating systems to Fiserv Premier. This was a significant decision and a monumental initiative. In August we converted our legacy bank systems. In October we converted our acquired omni bank systems. And in November we converted our acquired Summit bank systems. We expect to complete conversion of our acquired FNB Shelby systems in February 2015 and are soon to be acquired Intervest systems in June 2015. Additionally, in the second quarter of 2015 we expect to open our new Arkansas data center which is now under development. Our core systems convergent project has been a significant undertaking but combined with our new data center is necessary to position us for the growth and enhanced service we are planning for both our internal and external system users in the years to come.

In November and December of 2014, we entered into agreements with the FDIC terminating our loss share agreements on all seven of the banks we acquired in FDIC assisted transactions back in 2010 and 2011. The FDIC has been an excellent working partner on these transactions and their staff should be commended on how wisely and effectively they handled the resolution of so many failed banks during the great recession. We believe our termination of these loss share agreements should provide us greater flexibility going forward in serving the needs of our customers in these markets. While also allowing us to redeploy the resources previously committed to the administration of loss share. As you will recall, as part of our FDIC assisted acquisitions, we recorded our receivable from the FDIC based on expected future loss share payments and we recorded a clawback payable to the FDIC based on estimated sums we expected to owe the FDIC at the end of the loss share periods. The FDIC loss share receivable and the related clawback payable were discounted to net present values and such discounts were accreted into income over the relevant time periods. In the second and third quarters of 2014, this income statement item flipped from net or two net amortization expense as compared to net accretion income in previous quarters. As a result of the termination of our loss share agreements we recognized no accretion income and no net accretion expense related to these receivables and payables in the fourth quarter. Of course this income statement item should be zero in all our future quarters unless we enter into future loss share of transactions. Termination of our loss share agreements resulted in receiving a final net cash payment from the FDIC and zeroing out the remaining balances of our loss share receivable from the FDIC which totaled $36.6 million at September 30, 2014 and our clawback payable to the FDIC which totaled $26.7 million at September 30, 2014. The final net cash payment from the FDIC exceeded the difference between our loss share receivable and our clawback payable resulting in an unusual item of non-interest income of $8.0 million in the quarter just ended. This unusual income items was all set by an unusual item of non-interest expense namely $8.1 million in prepayment penalties resulting from our prepayment of our higher calls to FHLB advances. Specifically on December 16, 2014 we prepaid $90 million of callable FHLB advances with a weighted average interest rate of approximately 4.13% and maturities in August 2017. For those of you modeling our balance sheet and income statement going forward this left us with $190 million of callable FHLB advances outstanding at December 31, 2014. These remaining advances have weighted average interest rate of approximately 3.63% and maturities ranging from August 2017 to January 2018. From what I have just described, you can see two positive results of our termination of loss share and there is somewhat related FHLB prepayment transaction. First, we will no longer incur what it become net amortization expense related to our FDIC receivable in clawback payable. And second, the prepayment of this $90 million of higher rate callable FHLB advances will result in future interest expense savings. Of course, termination of our loss share agreements had other impacts on our balance sheet and will have impacts on future income and expenses. On the balance sheet, in addition to the cash received and the elimination of the FDIC receivable and clawback payable, we have reclassified our covered loans which had a balance of $248.8 million as of September 30, 2014 to purchased loans and we reclassified cover foreclosed assets which had a balance of $27.9 million as of September 30, 2014 to foreclosed assets. In regard to future income and expenses, termination of the loss share agreements will have no impact on the yields for the loans that were previously covered under those agreements. However we will no longer - you will no longer see the balances and yields on our previously covered loans separately stated since they've now been combined into purchased loans. Additionally, termination of loss share means that all future recoveries, gains, charge-offs, losses and expenses related to the previously covered assets will now be recognized entirely by us, since the FDIC will no longer be sharing in such items. Accordingly, our future earnings will be positively impacted to the extent we recognized recoveries in excess of the carrying value of such assets and the gains on any sales. Conversely our future earnings will be negatively impacted to the extent we recognized charge-offs, losses on any sales, and expenses related to such assets. We believe termination of our loss share agreements will have a net positive effect on future earnings. That expectation is based on our historical experience in which we've recognized combined net recovery income and gains on sales in excess of our combined net charge-offs, losses on sales and related expenses. If that relative performance continues, we should benefit farther from the termination of loss share.

Net interest income is traditionally our largest source of revenue and is a function of the volume of average earning assets and net interest margin. We enjoyed a very positive trend in net interest income throughout 2014. Of course, loans and leases comprised the majority of our earning assets. In the quarter just ended, our non-purchased loans and leases, which exclude purchased loans grew a healthy $341 million. Our unfunded balance of closed loans increased another $380 million during the quarter just ended and now totals $3.96 billion. While some portion of this unfunded balance will not ultimately be advanced, we expect the vast majority will be advanced. This has favorable implications for growth in loans and leases in 2015 and beyond. In 2014, we’ve benefited from having five engines for growth in earning assets. The strongest of these five organic growth engines is Real Estate Specialties Group which has contributed the majority of our organic growth in recent years and did so again in the quarter just ended. We believe Real Estate Specialties Group will continue to be our strongest engine for organic growth in earning assets for some time to come. With that said, we continue to believe that our other organic growth engines will contribute more to growth in earning assets in future years than in recent years. These other growth engines include our vast network of community banking offices in seven states, our leasing division, our relatively new Corporate Loan Specialties Group and our investment securities portfolio. All with the exception of our investment securities portfolio, each of these other organic growth engines made positive contributions to our growth in earning assets in each quarter this year. We seem to be hitting on all cylinders. A great deal of work has gone into building the talent and the infrastructure needed to make all five of our organic growth engines effective. The geographic and product diversity of our different growth engines are significant factors in our optimism regarding our ability to achieve increasing levels of growth in earning assets in 2015, and beyond. In 2015, our goal is to achieve growth in non-purchased loans and leases exceeding our 2014 growth of $1.35 billion. We believe this is a very reasonable goal given our current momentum and considering our $2.96 billion unfunded balance of loans already closed.

While we were very pleased with our growth in 2014, we are even more pleased with the credit and interest rate risk profile of the loans and leases we have booked. Throughout 2014, we obtained large amounts of cash equity in most new loans, continue to require appropriate risk adjusted pricing, and actually increased our percentage of variable rate loans, which now comprise 72.9% of total non-purchased loans and leases. That's up from 68.7% at December 31, 2013. As you can see from the decline in our net interest margin for the full year of 2014, compared to 2013. We are not totally immune to the effects of the current competitive pricing environment, but our team seems to be doing relatively well. It takes hard work and great discipline to achieve loan and lease growth while adhering to stringent credit risk and interest rate risk standards. In regard to net interest margin, our fourth quarter net interest margin on a fully taxable equivalent basis was 5.53% .For the full year of 2014, our net interest margin was 5.52%, which was a decline of 11 basis points from the full year of 2013. This compares to our 28 basis point decline in net interest margin from 2012 to 2013. Given the continued decreases expected in our balances of loans acquired in previous acquisitions, including the higher yield in loans previously covered under loss share and considering the current low rate ultra competitive environment in which we are operating, we expect another year of declining net interest margin in 2015. Excluding the effects of any future acquisitions beyond the interest acquisition, we expect a decrease in our net interest margin in 2015, somewhat similar to the 28 basis point decrease in net interest margin we experienced in 2013, as compared to 2012. We expect that our cost of interest bearing deposits will increase somewhat in coming quarters as a result by deposit gathering activities to fund expected future loan and lease growth. During the quarter just ended, our cost of interest bearing deposits increased four basis points from 23 basis points in the third quarter of 2014, to 27 basis points in the fourth quarter. Because of the excellent loan and lease growth achieved in 2014, and our increased expectations for loan and lease growth in 2015, we expect we will need to achieve substantial additional deposit growth this year. As expected, increased growth is a positive for us but it will also mean that somewhat higher cost of interest bearing deposits. During 2015, we expect our cost of interest bearing deposits to increase each quarter by somewhere between one and five basis points. Of course that expectation is factored into our previously mentioned net interest margin guidance and excludes the effect of any future acquisition beyond the Intervest acquisition.

Let's discuss our non-interest expense, our efficiency ratio, and the numerous unusual items of non-interest income and non-interest expense that impacted our 2014 results. Our efficiency ratio for the quarter just ended was 44.1% compared to 45.5% for the fourth quarter of 2013. Our efficiency ratio was unchanged at 45.3% for the full year of 2014, compared to the full year of 2013. While our efficiency ratio will vary from quarter to quarter especially in quarters where we have significant unusual items of income and non-interest expense, we expect to see a generally improving trend in our efficiency ratio in the coming years. Our expectation for improvement in our efficiency ratio is predicated on a number of factors including our expectation that we will ultimately utilize a large amount of the current excess capacity of our extensive branch network. Our expectation that our ongoing core software conversion projects will reduce software costs by approximately $2.75 million per year starting in 2015, while providing greater functionality for our customers and employees, and creating other opportunities for enhanced operational efficiency and our expectation of achieving additional cost savings from our pending and recent acquisitions. Of course, we realize we are operating in an environment where health care cost continue to increase significantly, our many high performing team members deserve and require increases in compensation commensurate with their performance and regulatory compliance and various other costs continue to escalate. Our guidance regarding an improving efficiency ratio does not consider the potential impact of any future acquisitions. With that said, our pending Intervest acquisition should ultimately help us achieve an improved efficiency ratio. Although acquisition and conversion cost may adversely effect our efficiency ratio, in the quarters in which we closed this acquisition encumbered the systems. When we exceed $10 billion in total assets either as a result of additional acquisitions, organic growth or a combination of the two, we will lose some interchange revenue as a result of Durbin amendment. And we will incur increased regulatory compliance cost, both of which will eventually create some headwinds to our efforts to improve our efficiency ratio. In our last conference call, we were asked to quantify the estimated impact of the Durbin amendment on our interchanged revenue after we exceed $10 billion in total assets. If the Durbin amendment had been applicable to us in the quarter just ended, we estimate that our interchange revenue would have been reduced to approximately $1.2 million or roughly $4.8 million on an annualized basis. Our results for the both the fourth quarter and full year of 2014, was significantly impacted by unusual items of non-interest income and non-interest expense. During the quarter just ended, we benefited from $8.0 million of income from termination of our FDIC loss share agreements, but we incurred prepayment charges of $8.1 million from prepaying FHLB advances and approximately $1.1 million of acquisition related in system conversion expenses. For the full year of 2014, we benefited from the $8.0 million of income from termination of our FDIC loss share agreements and $4.7 million of tax exempt bargain purchased gain from our Omni Bank acquisition. But we incurred the prepayment charges of $8.1 million from prepaying FHLB advances, $5.6 million of software and other contract termination charges. Approximately $4.7 million of acquisition related in system conversion expenses and approximately $0.6 million of fraud losses attributable to the Home Depot system breach. Among the unusual non-interest expense items for the quarter just ended, with cost related to our Omni Bank core system conversion which we completed in October. Our Summit core system conversion, which we completed in November and charges related to closing eight overlapping Summit and legacy branches in November. We will incur additional unusual items of non-interest expense in future quarters, including non-interest expense related to our core system conversions in recent and future acquisitions. In the first quarter of 2015, we expect to incur acquisition related expenses in connection with the planned completion of the Intervest acquisition and additional cost in connection with the February core system conversion of FNB Shelby acquisition. In the second quarter of 2015, we expect to incur cost related to the core system conversion of Intervest. Notwithstanding our expectation of some unusual items of non-interest expense still to come, we expect to see improvement in our efficiency ratio in 2015 as the magnitude of such unusual items of non-interest expense wanes and as the benefits of cost savings from our new core systems software, operational consolidations, and the recent branch closings are realized.

Traditionally we would close our call with the discussion of asset quality and our traditional strong focus on credit quality. Our excellent asset quality results throughout 2014, speak for themselves and we expect another good year in regard to asset quality in 2015. At this point we expect that our 2015, net charge off ratio for total loans and leases will not be significantly different from the excellent range of net charge-offs ratios we have experienced for total loans and leases in 2014, which was 26 basis points, and in 2014, which was 16 basis points. We want to make a few comments about growth and acquisitions. Organic growth of loans, leases and deposits continues to be our top growth priority and we’ve clearly demonstrated our ability to achieve substantial growth apart from acquisitions. With that said M&A activity continues to be another focus as we believe M&A provides significant opportunities to augment our healthy organic growth. We continue to be active in identifying and analyzing M&A opportunities and we believe an active and disciplined M&A strategy will allow us to continue to create significant shareholder value.

We expect another great year in 2015. And while we do, we should probably close today’s call with our customary remarks regarding the first quarter. We’ve cautioned for years that first quarter is typically our most challenging quarter as a result of numerous seasonal factors. First quarter has one or two fewer values than other quarters. Lower post holiday consumer transaction volume typically results in lower service charge income. Home sales are typically lower in the first quarter result in less mortgage income. Business disruptions due to winter weather are not uncommon, and our annual premium increase for health insurance and a majority of our salary increases take effect in the first quarter. These seasonal factor should be considered in establishing any quarter-to-quarter estimates for 2015, which we expect to be another record breaking year for Bank of the Ozarks'. That concludes our prepared remarks. At this time, we'll entertain questions. Let me ask our operator to once again remind our listeners how to queue in for questions.

[Operator Instructions] Our first question here comes from Mr. Jennifer Demba from SunTrust Robinson. Please go ahead.

Just curious on your thoughts on growth of the Texas economy and from your Real Estate Specialties Group for 2015, given that oil has continued to slide over the last month or so, further. I know when you and I talked in December, you didn't seem too concerned about it. But I'm just wondering about your thoughts now in terms of your overall growth outlook.

Jennifer, I am still not too concerned about it. Let me make a few comments on that. If you look at our September 30, 2014, 10-Q on page 55 of that Q, you would have noticed a table that showed the percentage of our loans by State of originating office. And at that point, Texas accounted for a little over 50% of our total originations came from our dozen or so offices in Texas. But those Texas, offices include the Dallas, Houston, and Austin offices of our Real Estate Specialties Group that has made loans in 41 States, at September 30, and rolling forward to December 31, had loans literally all across the country. So to say that we have over 50% of our loans in Texas, is a misnomer and inaccuracy because - in fact, our Texas, offices have originated over 50% of our loan, but the portion in Texas is much less than that. If you look at the geographic distribution of our non-purchased real estate loans that are on pages 56 through 58 of that September 30, 2014 10-Q2, you can see a breakdown of loans by State of collateral. And Texas is our second largest state for loans at September 30, trailing Arkansas. At that time Texas accounted for about 23.8% of our non-purchased real estate loans and about 20.2% of all of our non-purchased loans as of September 30. So, yes, we have a significant amount of loans in Texas, but it's not the 50% plus that one might surmise if they look just at the state of originating office. Now, with that said, I want to tell you if we had 50% or 60% or 70% of our loans in Texas, that would not bother me at all. Because I think the Texas economy even in the depressed oil price environment is still one of the best economies in the United States. We've seen previous oil shocks in the past, this is not a new phenomena, if you go back to the early to mid 80s, there was a multi year drop in oil prices and that drop in oil prices did have a fairly significant adverse effect on the State of Texas. But at that point in time the percentage of oil and gas as a percent of taxes, total GDP was much higher, many percentage points higher than I believe it is now. And that drop in oil prices in the 80s occurred at the same time that our country was going through a farm crisis, a savings and loan crisis and the wake of poll workers wore on inflation. The effects of the Tax Reform Act of 1986, that eliminated passive loss deductions on real estate and reset real estate values to true economic values which reset those downward. Texas was hard hit by all of those phenomena in the 80s at the same time that it was incurred in that oil and gas shock. So that was a really tough time on the State of Texas. But Texas is a much different economy today, far more diversified or less dependent upon oil and gas than it was in the 80s. We've seen a couple of other oil and gas price shocks, and I think it was 1991 or so and then 2001, 2002, that had very minimal effects and then 2008, 2009, while the country was entering into and going through the great recession, oil and gas prices dropped from like $140 a barrel to $40 a barrel and yet the Texas economy because of it's diversification rebounded very quickly even in the midst of the great recession was one of the fastest State to come out of that in one of the strongest forms. So I think one has to keep all this in perspective. The other thing that is different about Texas, today than in even 2008, 2009, and certainly than the 80, is there is not an excess supply of real estate product out there in most of the markets. We're doing lots loans in Texas, we're doing home loans in Texas, and most of these transactions we’re looking at there as far below in equilibrium supply of lots in homes existing. If you’re doing apartment projects, the demand exceeds the supply of apartments, if you’re looking at office projects in Texas, I think there was an article yesterday or this morning in one of the Dallas, media outlets, maybe in the Dallas morning news talking about the fact that the vacancy rates on office in the Dallas area are the lowest in a decade. So, when you look at the supply demand metrics in the state of Texas, there is really an under supply of most real estate types. So I think if you’re concerned about a real estate lender like us in the State of Texas, that's a very conservative low leverage real estate lender on high quality projects, I just don't think there's going to be much of any significant adverse impact. And if you look at that chart in our Q on page 56, where the geographic distribution of our loans are obviously the Midland/Odessa MSA is probably the most vulnerable in Texas. We had $23 million of assets by year end in CRE in construction and development, those are very low leverage assets, I think it’s two or three assets. One of those assets is off right into over 4X debt surface coverage, the last time I looked at that a couple of months ago. And when you're in places like Midland/Odessa or Sweetwater or some of these other just totally all depended markets, that still exists out in other areas of Texas, that's the way you underwrite credits is you underwrite realizing that's it’s a boom-and-bust economy. And when you underwrite things in a boom cycle, you set your leverage and your debt service coverage like a pour - debt service coverage target so they work in the bust parts of the cycle. So we have very little exposure in the Texas markets like Midland/Odessa that are very dependent on oil and gas or very conservatively underwritten on most exposures. So we just feel very good about those assets. At September 30, in Houston MSA - Houston/Woodland/Sugarland MSA we had about $157 million in assets in Houston, excluding purchased assets. And we got one of our big pay-offs in Q4, we had a lot of pay-offs in Q4. In the last day of the quarter we got $37 million pay-off on our loan in Houston. And I can tell you we were extremely sad to see that loan go because it was a very high quality asset, and we’re making new loans in Houston today, we’re entertaining new loan opportunities. We’re not running from any of these markets because they’re fundamentally sound markets and if you're underwriting quality projects at low leverage that make really good economic sense, the real estate market is such that there is a need for more supply not less supply of most types in most markets in Texas, today. So I think concerns about real estate values in Texas are way, way overblown.

George, do you think you will get any better pricing down there or market share opportunities as maybe other institutions get more cautious on that market since they maybe don't know it as well?

We are very hopeful that that will be why that plays out. We’ve had very little net new origination volume in Texas the last couple of years because it’s been well known nationally as a very hot market. So you’ve had a lot of visiting lenders coming into that market and doing deals at higher leverage than we thought was prudent and lower rates than we thought was prudent. And hopefully now, the headline perception of being in that market is less favorable, some of those visitors will go away and that will afford us opportunity to do business at a higher volume in Texas, at rates and leverage that we consider appropriate and we think there’s actually the potential that this is a good upside development for us in Texas this year.

Thank you so much.

Thank you. Our next question here comes from Michael Rose from Raymond James. Please go ahead, sir.

Maybe I can ask the question around Texas. When I look at the growth in the unfunded balance of closed loans, which has been growing at a very accelerated pace, how much of that growth came from Texas? And then as you look out into next year, given everything that you just said, would that pace potentially slow in Texas? What would be the puts and takes?

Well, as I’ve said in response to Jennifer’s question, we’ve had very little net growth in Texas, the last couple of years because it’s been such a hot market that it’s attracted a lot of visiting lenders and a lot of lenders doing things more aggressive terms than we thought were appropriate. So that applies to the funded and the unfunded balance of that loan. The largest amounts of that growth in unfunded loan balances are probably California and New York and other West Coast and East Coast markets really reflecting the fact that we’ve opened within the last year and half new offices in New York and California. Places where we already did business before we had offices there, but now have boots on the ground and hence we’re seeing more opportunities and able to respond to those opportunities a little more quickly than before because of our staff on ground. So, Texas is probably one of the slower growth pieces of that unfunded balance over the last year and New York and California are probably the largest growth bases. Again, I am going from September 30, data that’s reported in our 10Q but our total Texas outstanding balances September 30, 2014, were $735 million on real estate, and California was $308 million, New York was $285 million, and I would expect those California and New York balances to come close to overtaking Texas in 2015, based on loans that are closed and on the books. Of course pay offs can move that around and so forth but certainly those have been two significant growth markets for us in the last year.

Okay. That's helpful. And then just two quick follow-up questions. First on the margin outlook that you gave us. I just wanted to be clear that's for the full-year margin relative to 2014's full-year margin. And then second, I just wanted to get sense for the mortgage income which was down sequentially. Some of the other banks that reported actually saw a positive move in mortgage this quarter for refi. Any comments there would be helpful. Thanks.

Yes. I can give you a little data on the mortgage color we originated little over $50 million of loans, the resale in the secondary market in Q4 that compared to $63 million in Q3 and $51 million in Q2. So we were down a little bit from both the second and third quarter levels. I am really good at predicting mortgage income and volume about two weeks out, and I am telling you in the first two weeks of the year because of the very significant drop in the tenure treasury right and so forth, we’ve probably seen more mortgage activity in the first half of this month than we saw in all of December. So we are seeing - and who knows if that’s a short term or a full quarter or two quarters impact of increasing volume in the last couple of weeks from lower rights, we really didn’t see much of that impact in December, our December volume was $16.7 million versus November was $17.1 million and October was $17.4 million. So, we were pretty flat month-to-month in Q4, but there does seem to be an acceleration in refi activity in the first part of January, which is unusual. It’s normally or seasonally slow time, but it is unusual when it’s driven by the fact that you got the tenure down around 175 or whatever it is today driving some interest in that. I am sorry Mike, your other question was - margin guidance for the full year. That was full year margin guidance for 2015 versus 2014.

Okay, great. Thank you.

Thank you. Our next question here comes from David Bishop from Drexel Hamilton. Please go ahead.

A quick question for you -- in terms of the deposit spin-up amongst the branches there, first question, do you plan on expanding that across the footprint at all? Have you seen any response from the competition thus far?

At this time, we do not plan on expanding it. In fact, as of Monday of this week, we actually dropped our rights and activity in a number of offices. And the reason we did that is the Intervest transition expected to close February 10, will bring us a lot of cash. Those guys are sitting on in excess I believe of $100 million of cash or so, and they have about $200 million or something of bonds that are very short term, low yielding bonds that we expect to sale. So as a result, when we close the Intervest transaction through liquidating that bond portfolio and have been into the cash by half, there’s over $300 million. We expect of cash there that will be available to fund our loan growth. So we realize that that is going to go along while we’re covering our first quarter growth when you at that in with Tyler what we have at the end of the year, $75 million or so of excess cash. We were sitting on about $75 million. So our excess cash, it ended the year plus Intervest is about $400 million and even apart from the spin-up we’re generating net positive deposit growth in most of our offices. So, we’ve decided that we could basically drop those offices down lower to rates, cut the advertising, wait until we solve the situation where we’re going to need more cash to fund loan growth in future months and then we’ll spin those backup. At this point given the success we had in Q4 in rising deposits. We’re going to monitor our needs and decide our strategy at that time. We are having discussions now when we re-spin office, would we be better off to spin-up offices or would we be better off to re-spin those offices that we reduced rates as of Monday of this week. And that analysis will be ongoing and will continue and we won’t know what the mathematically best solution to that question is until its time to make the decision because market conditions change, competitors move around and a variety of factors could alter our thinking on that between now and when we actually re-spin some of the offices backup in several months.

Got it. Thanks. And just one follow-up there. In terms of the special real estate specialty offices, any plans on potentially looking at some other cities here in 2015 to pursue some new opportunities across the country?

There’s a real possibility that we’ve not opened one or two more office. As you know Real Estate Specialties Group doing the very complex loans that we do in Real Estate Specialties Group, but we get very low leverage and get paid appropriately and decently for the work involved in that. We think that that is ultimately about an $8 billion book of business nation-wide funded and about an $8 billion book of business unfunded. So, a total of about $16 billion funded, non-funded is kind of as far as we can push that, that unit doing the really high quality, very complex deals that we do – that we get just low leverage and paid for so well. It’s a fund at universal transactions. And at September or December 31, we were north of $5 billion funded, non-funded, I don’t know the exact number, so I don’t have them at my finger tips here, but it was over $5 billion combined. So, we’re somewhere between a third and a forth of the way to achieving our full potential of that unit. To achieve that full potential, we think that we would benefit from having an office in the north-west probably in Seattle to serve Seattle Portland, Salt Lake City, Denver sort of market and office in Boston to serve the New England market, you know its very distinct set of markets from our New York office to serve New York, New Jersey and Connecticut. Possibly an office in Chicago at some time and certainly to serve the upper Midwest and certainly an office in the Washington DC area to sever the Mid-Atlantic and prioritizing all those things, we would probably put Washington and Seattle offices is kind of one or two or two in one in the order and the Boston and Chicago offices is three or four, some point it four or three in the order of location. So wouldn’t surprise me up over the next 24 months you saw us open as many as four additional Real Estate Specialties Group offices and with that I think we can pretty much cover the United States.

Great. Thank you.

Thank you. Our next question here comes from Blair Brantley from BB&T. Please go ahead.

Question for you, regarding the purchase loans and kind of the runoff, what are the expectations there? I guess going with what you mentioned before about Intervest in terms of that maybe staying flat, just maybe in the updated thoughts would be very helpful.

I’ll let you - we’ve combined I think in our disclosures, the previously covered loans and previously other non-covered purchase loans into a single line items since they are now all in the same category. So, our last acquisition was in May, so what I would suggest you do is look at the combined data at June 30, September 30, December 31, and get out since that is now a combined pool, look at the run rate on that and you can draw your own conclusions as to whether that speeds up or slows down. My sense is the run rate at the bottom right to the portfolio going away probably slows a bit, but the last six months would be my best suggestion that you for starting point for predicting how that portfolio would run off. Was there another part to your question?

Okay. Yes. Sorry about that. I wasn't sure if you were done or not. On a different point, any more thought on future debt prepayments with the FHLB advances?

That’s a possibility, and we really had not planned. That was not in our – specifically in our plan for the year, but when we recognize the significant gain on the prepayment or the termination of our loss share agreements we looked at it and said, gosh, instead of just letting that fall through at the bottom line, let’s use that for good and useful purpose and prepaying those highest cost advances seem to be an appropriate way to do that. So, if we ended up with other unusually favorable income scenarios, we might do that strategy again.

Thank you very much.

Thank you. Our next question here comes from Albert Meyer from MM Cap. Please go ahead.

Can you just talk about the accretion that you are expecting from the Intervest transaction? And timing, like when can we expect to see that in the numbers?

Well, the assets or the loans, we’re in the process of valuing those loans now. The valuation on those loans will determine the credit mark on the loans and will determine net present value discount that we applied at those loans. We will be valuing the deposit base on the day of or the day following closing. So we’ll know pretty much what the adjusted fair value of all the assets are by the time we get the transaction closed within a week or so following the February 10 closing on that. At this point its too premature to revise any guidance that we gave when we announce the transaction, we filed 8-K in connection with that transaction, that’s record with the SEC that had a slide deck attached to it that talked about our accretion to book value per share, tangible book value per share and earnings per share from the transaction. I’m going to let that previously disclose data stand at this time. We will probably provide some revisions of that data subsequent to the closing when we complete the valuations of all assets and the liabilities of the transaction. So let me just refer you back to that previous disclosure. In regard to when we’ll recognize that, obviously the accretion, the book value per share, intangible book value will be reflected immediately upon closing and booking the transaction. So you will see in our March 31, 2015 balance sheet and capital position. The EPS accretion, that number is given based on full 12 months following closing. I think its excluded acquisition cost and conversion cost which Tyler mentioned in his prepared remarks this morning, we’ll have some unusual acquisition cost in Q1 and the conversion cost in Q2. But by Q3 you should see pretty clean numbers without being impacted by the acquisition and conversion cost and sort of the full effect of that EPS accretion on a go forward basis should be in our Q3 and Q4 numbers. We will made any cost adjustments to their overhead and our overhead as a result those wholly reflected then, but we would expect to see some accretion even in Q1 and Q2, again it will be sort of mitigated in those quarters by the unusual acquisition and conversion costs.

Great. And does Intervest's loan book have any exposure to the oil markets?

They have a fairly diverse portfolio. It’s mostly concentrated in New York and secondarily in Florida. But they do have some tertiary exposure around on sort of Triple Net projects in a variety of other markets mostly Triple Net not all Triple Net and other markets, but I think their exposure to any oil patch market is extremely limited if there’s any of it, but I’ll refer you to them for a more definitive answer on that since we’ve not yet close the transaction.

Great. Thank you.

[Operator Instructions] And we have also a question from Brian Zabora from KBW. Please go ahead sir.

A question on charge-offs. I just wanted to see if in the current quarter if there is any impact from exiting the FDIC loss share and if you saw any type of losses after that occur. And did that impact charge-offs at all?

Nothing material or unusual there, I mean, there is thousands of loans in those portfolio, so you got lower charge-offs going on all time on things, but nothing unusual or material related to that at all.

Okay, great. And then on a loan loss provision side, it was up from third quarter. Is there anything you can give us as far as maybe what part of the model maybe dictated an increase in the provision levels? As it looks like your credit continues to be very excellent.

Yes. Mostly that was a result of just special allocations on particular loans and so forth and a little higher level of charge-offs. As you mentioned we had one credit relationship as an Arkansas based, Central Arkansas credit relationship that was a developer, builder fairly sizeable relationship that we’ve had in the bank for, gosh, a couple a decades. And these individual companies got fairly hard hit in the downturn and 2008, 2009, 2010 managed to get through that, but just never could regain much momentum. So the customer in the last quarter advice us that they’re going to liquidate their operations in an orderly manner, we’re working with them, but their loans went on non-accrual and went pass to – or bunch of them did in the fourth quarter, you can see that in the uptick of our non-accrual and pass through numbers that also contributed to the charge-offs. Now we think we’ve been pretty conservative about it. We’ve got a lot of different credits here. It’s about our $8 million, $9 million, $10 million relationship or so. And we went through there and on our credit by credit basis rode it down based on the primary collateral through a liquidation value on each piece of collateral. As it turns out I think there’s equity in some pieces of collateral on some loans that we didn’t allow credit from the other loans. So I think we’ve been pretty conservative in that. The customers on individual of integrity, you know they’re going to work themselves, liquidate themselves basically out of business, so for the next year, so I think that little hike up in the ratios will go away. The other increases in provision expense were just simply related to the normal even flow of reductions in specific provisions, increases in specific provision and also reflective of the fact that we had a lot of growth in the quarter.

That's very helpful. Just lastly, you talked about Texas -- still a big part -- not backing away from that market. But is there any market that you see in your national footprint that you think maybe is getting a bit overheated and that maybe you are stepping back from?

We’re not stepping back from markets, but certainly you got some markets that are very hot, and you just got to take that into account in your underwriting and your leverage and your transaction structure, certainly the New York market would probably be the foremost of those – the amount of property being developed by the class and particularly at the top end of that market seems a little bit unreal. But with all that said, there is amazingly supportive fundamentals on a number of metrics that support what’s going on there. So we’re underwriting very cautiously and carefully with that market, because values had really come up and we’re really working hard to keep our leverage low, so that we’re protected if some of that ends up being given back in the future.

Great. Thanks for taking all my questions.

We also have a question here from Peyton Green from Sterne Agee. Please go ahead.

Just a question maybe with regard to your outlook for M&A. I know you've been optimistic and certainly have had some great success in getting a number of attractive acquisitions done. As you sit today, how does the pipeline look today? Or the potential reality look today compared to maybe where it was six months or a year ago?

Peyton, the pipeline is basically very comparable – the pipeline six months, a year or 18 months ago, there are more opportunities out there than we can – than we have the resources, manpower to analyze and pursue, so we’re doing what – and I know I’m going to record this message, so this apply every quarter when get asked this, but it really don’t change a lot. We’re constantly every five, six weeks, four, five weeks meeting as a team to prioritize things that we think might create grow shareholder value focusing on those. We’ve been successful to wining the buyer on a number of transactions as we’ve reported and you know and we’ve been unsuccessful as a – unsuccessful better on a number of transactions that they went for a prize that we thought was higher than we wanted to pay for it. So it continues to be a big focus as I’ve said in my prepared remarks, we continue to be optimistic that we will do a number additional transaction. Our goal is to basically grow our balance at a 20% to 25% rate organically. We think we’re in a situation and it created business and business models and teams of people that make that a very realistic go. And acquisitions, we considered to be icing on the cake on top of that. So we’re hopeful we’ll make a number of acquisitions that will be accretive to our shareholders, very good transaction, create value for shareholders, but as I’ve said in my prepared remarks, the primary focus is to keep that organic growth going with our goals of achieving top decile - asset-quality, top decile margin, top decile efficiency, and grow that in a 20% to 25% rate and then let acquisitions add on top of that.

Okay. And then maybe just an update on your outlook for the corporate specialties group or commercial specialties group.

You know we are still refining and defining what we’re doing there. That unit ended the year at just under $100 million. And if we can squeeze another $100 million growth of that unit next year that would be very positive. We started that with the concept and our plan for whoever it is going to go that is evolved - it continues to evolve and I think we will have that plan more defined and in place by the end of the next year. But I like where we're going with it. And I think it will generate some positive growth for us in 2015.

Okay. And then last question, George, maybe from a competitive perspective do you see things any more competitive today than there were 90 days ago or six months ago? Do you get the sense -- do you worry about the hypercompetitive aspect, or is it just consistent with the way it's been?

You know one of the problem with the economic environment in which every bank in the country is operating is the system has been flooded with liquidity compliments of that, and we're at extraordinarily low rates. And the economy is - despite the fact we had a massively good third quarter growth I think everybody saw the same the reality that our GDP is probably more of the 1.5% to 3% GDP than a 5% to 6% GDP growth. And the reality is, you got lots of liquidity and very low rates and a slow growth environment, you’re just going to have this competitive environment in which we are operating. So on the margins it is moving around a little bit quarter-to-quarter and its like a boxing match, you sort to have keep your feet under you and continually adjust your position just a little bit to try to not get sucked down or hurt by that competition. But we've been able to do that effectively so far. I think we will continue to have to adjust every so slightly our strategy on a day-to-day, week-to-week, month-to-month basis to do it. Hopefully we can continue to do that. Balance in environment, requires one to pay close attention all the time.

Thank you for taking my questions.

And our last question here comes from Mr. Brian Martin from FIG Partners. Please go ahead, sir.

Hi, guys. Most of my stuff has been answered. Just a couple of housekeeping questions. George, you talked about -- you gave the variable-rate loan number in the quarter. I wanted to say it was about 72 or 73. Is that number -- is that something you are still trying to increase as you go into 2015 here? Is it at a better level now than more sustainable?

I think we will continue to increase it. Everything we do in real estate specialties group is variable rate, every time we do in corporate specialties group is variable rate and I'm continuing to emphasize the variables rates to our lenders and our community banking group as well. Everything we do leasing is fixed. But corporate loans specialties group and real estate specialties group for growing faster and percentage terms than community banking and leasing. So, the portfolio should tend to get more variable. And we were 72.9% variable at December 31. Since you raise that subject Brian, I will give a couple of other data points just to get them out there publicly on that. 93% of our variable rate loans were at a floor. So only 7% of our variable rate loans were just immediately with the first quarter increase in rates. But interestingly, only 51.7% of loans are at their floor after a 25 basis point increase in rates. This is a big differential from where we were a year or two years ago. So, while only 7% of our loans just rate with first quarter move from LIBOR or whatever, we'll say the Fed funds target rate but LIBOR. The second quarter moves catches now 48% plus of the portfolio by the time rates move 100% only 23% of our variable rates loan were still at the floor and by the time rates move 200% only 3.5% of our loans are still at the floor. So the floor and formula rates have converged much more closely over the last year as new originations have replaced older origination. And that is making our loan portfolio much more rate sensitive in an upright environment. And we will react more quickly. So as you look at our up 100, 200, 300, 400 net interest income changes that should reflect that increasing sensitivity and general and the increasing sensitivity particularly in the low rate increases going forward. So, we are real pleased with the evolution of that portfolio and the fact that we've been able to get it so much more rate sensitive while at the same time giving a very small amounts of net interest margin.

Thanks for that. And maybe one other question on the loan portfolio -- the non-purchase portfolio in the quarter. Could you just give a breakdown if you have it on the growth by bucket in real estate specialties and for the other engines as far as which are the contributors in the quarter?

I don't have that breakdown for some reason. Data didn't get to me for the call but I can give you by products time. Residential one to four, loans were up $5 million, CRE loans were up not what we call non form non residential were up $115 million. Construction and development loans were up $179 million, multi-family was up $55 million, C&I was down $10 million, leases were up $6 million and other loans of that category of other catchall bucket was down $10 million. So, it was - the quarter was largely driven by growth and construction and development first, CRE second and multi-family third.

Okay. Perfect. And then the last thing, you mentioned that interchange impact on the $10 billion level -- the $1.2 million I think was what you said think it was this quarter. What was the total interchange income in the quarter? So if you lose $1.2 million, what was interchange income this quarter?

I don't have that. I am looking at Tyler and - I think what Greg is saying and Tyler are huddling over here - $1.2 million was about 40% of the total. So, 40% of the total that would be roughly up $3 million total interchange and -

Perfect. Thanks for taking the questions.

And at this time I'm showing no further questions from the audience.

Thank you guys for joining the call today. We appreciate you all participating. No further questions. We will look forward to talking with you in about 90 days. Thank you very much.