Bank Ozk (OZK) 2010 Q4 法說會逐字稿

Good afternoon my name is Sameria, and I will be your conference operator today. At this time I would like to welcome everyone to the Bank of the Ozarks fourth-quarter earnings conference call. (Operator Instructions). I would now like to turn the call over to Ms. Susan Blair. Ma'am, 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 fourth quarter and the full year of 2010 and our outlook for upcoming quarters.

Our goal is to make this call as useful as possible in understanding our recent operating results and future plans, goals, expectations and outlook. To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook for the future, including statements about economics, real estate market, competitive, credit market and interest rate conditions, revenue growth, net income and earnings per share, net interest margin, net interest income, noninterest income, including service charge, mortgage lending and trust income, noninterest expense, our efficiency ratio, asset quality and our various asset quality ratios, our expectations for provision expense for loan and lease losses, net charge-offs and our net charge-offs ratio, our allowance for loan and lease losses, loans, lease and deposit growth, changes in the value and volume of our securities portfolio, the opening and closing of banking offices, and our goal of making additional FDIC-assisted failed bank acquisitions.

You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call.

For a list of certain risks associated with our business you should also refer to the forward-looking information caption of the Management's Discussion and Analysis section of our periodic public reports, the Forward-looking Statements caption of our most recent earnings release, and the description of certain risk factors contained in our most recent annual report on Form 10-K, all as filed with the SEC.

Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements, and are not guarantees of future performance.

The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise.

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

Good morning and thank you for joining today's call. We are very pleased to report excellent fourth-quarter results and our 10th consecutive year of record net income.

In December we closed our fourth FDIC-assisted acquisition of 2010. Each of last year's acquisitions was very profitable, but even apart from the acquisitions, our fourth-quarter and full-year 2010 results were excellent.

Though we are certainly pleased with achieving such strong earnings in the midst of a sluggish economy, we are even more enthusiastic about our positive trends over the past year. Let's take a look at some of the details.

Net interest income is our largest source of revenue. Of course, net interest income is a function of both net interest margin and the volume of average earning assets, both of which increased nicely from the third quarter to the fourth quarter. This combination helped us achieve record net interest income of $33.9 million in the fourth quarter, giving us our second consecutive quarter of record net interest income.

Our full-year 2010 net interest income of $123.6 million was our 10th consecutive year of record net interest income. Over the last three years we have had very favorable improvements in our net interest margin. This improvement continued in the quarter just ended, as our net interest margin increased to 5.35%, up 4 basis points from the immediately preceding quarter, and up 46 basis points from last year's fourth quarter.

A number of factors contributed to the steady improvement in our net interest margin over the past three years. One of these factors was the excellent yields we have enjoyed on covered loans acquired through our acquisitions. Our two most recent acquisitions occurred on December 17 and January 14. The prospect of having the additional covered loans from these acquisitions on our books for most or all of the first quarter bodes well for some further improvement in our net interest margin.

Another key factor in our improved net interest margin was the 10 basis point reduction in our average rate on interest-bearing deposits from the third quarter to the fourth quarter. Our average rate on interest-bearing deposits in 2010 was 56 basis points less than in 2009. This is a result of the improved quality and profitability of our deposit base in recent years.

Our non-CD deposits have grown significantly. Our level of brokered deposits have been greatly reduced. These changes have not only improved our net interest margin, but have also increased our business development opportunities and service charge income.

As we have acquired new banks we have moved quickly to eliminate their wholesale and high cost deposits and turn the focus there to building lower-cost core deposits. This is one of the reasons these offices have been immediately profitable.

Throughout 2009, and to a lesser extent in 2010, we have been a net seller of investment securities, which restrained or eliminated our growth in average earning assets in some quarters. This reduction in our investment securities portfolio was undertaken primarily as a result of our ongoing evaluations of interest-rate risk and also to free up capital from FDIC-assisted acquisitions.

In recent quarters we benefited from growth in average earning assets as a result of the addition of covered loans from acquisitions. The impact of this rotation in our mix of earning assets were seen in our net interest margin in 2010. Specifically, the addition of a significant volume of higher-yielding covered loans in place of securities sold earlier at much lower effective takeout yields, not only reduced our interest rate risk and improved our net interest margin, but it also resulted in gains on our securities sales and bargain purchase gains on our four acquisitions in 2010.

It is hard to not like a strategy that generates income from your sales, income on your purchases, and better margins with less interest-rate risk in the process.

Now let's shift the subject to noninterest income. Income from deposit account service charges is traditionally our largest source of noninterest income. We are very pleased to report record service charge income for the third consecutive quarter. For the quarter just ended service charge income was up 20.4% from last year's fourth quarter.

For the full year of 2010 service charge income was up 22% from 2009. These increases reflect a number of factors, including organic growth in our number of core deposit accounts, increased customer utilization of fee-based services, and the addition of core deposit customers as part of our four bank acquisitions last year.

As most of you know, August 15 was the effective date for new federal regulations that prohibited banks from utilizing overdraft protection programs to pay customers in overdraft or nonrecurring electronic debit transactions, unless the customer had previously affirmatively opted in for such overdraft protection. There was speculation that this would significantly reduce service charge income for the industry. For our bank the impact was not too severe, because we conducted a very well-planned and effective opt-in program.

In the second half of 2011 we will once again have to deal with legislative and regulatory headwinds in regard to service charge income. The Durbin amendment contained in the Dodd-Frank legislation will affect interchange income from debit cards, and pending FDIC guidance will also affect NSFOD income.

We are monitoring developments on both fronts, and we are already evaluating and implementing measures to mitigate, at least in part, the impact of these pending legislative and regulatory actions on our service charge income.

To date our primary focus has been on expanding customer utilization of various fee-generating products and services, but this will not nearly offset the effect on revenue we are likely to see. The next step is to carefully consider new fee income sources and overhead reductions. Our goal is to fully offset any lost revenue, but it remains to be seen if that can be achieved.

Mortgage lending income in the quarter just ended was up 119.2% from the fourth quarter of last year. This large increase was due to an elevated level of mortgage refinancing, which accounted for 76% of our mortgage volume in the most recent quarter.

For the year mortgage lending income was up 16.6% from 2009. The recent increase in mortgage rates, combined with the large volume of mortgages that have already been refinanced nationally, will very likely reduce the level of mortgage refinancing activity going forward.

Our trust income increased to 0.9% in the quarter just ended compared to the fourth quarter of last year. But for the full year of 2010 our trust income was up 10.6% compared to 2009. This was our sixth consecutive year of record trust income.

Net gains from investment securities and sales of other assets in the quarter just ended were $797,000, compared to net gains in such categories of $6.18 million in the fourth quarter last year. Net gains from investment securities and sales of other assets for 2010 were $5.35 million compared to net gains in such categories of $26.8 million in 2009.

Of course, the largest component of our fourth-quarter noninterest income was our $8.86 million pretax bargain purchase gain from our December FDIC-assisted acquisition. For the full year of 2010 noninterest income included a total of $35 million in pretax bargain purchase gains on our four FDIC-assisted acquisitions. There were no such gains in 2009.

As beneficial as these gains are, we think our fourth-quarter results, excluding these gains, makes it clear that the ongoing benefits from these acquisitions may be even more significant than the day one gains.

There has continued to be significant commentary to the effect that the opportunity for profitable FDIC-assisted acquisitions has largely passed. The profitability metrics of our December transaction suggest that very favorable acquisitions can still be made using our approach, which involves actively looking at numerous opportunities, while being very conservative in our underwriting and our bidding. This strategy has resulted in us being the winning bidder on just under 16% of the acquisitions on which we have performed due diligence.

Like you, we have observed a number of recent transactions that seemed to make very little financial sense, and frankly we were a significantly outbid on some of those transactions. However, we have stated from the beginning that we would do our due diligence, maintain our discipline in underwriting and vetting, and pursue transactions with a view to making profits both on the acquisition and from the ongoing operation of the acquired assets.

While we are still in the process of determining the valuation and purchase price of the assets and liabilities from our most recent acquisition in January, we expect that transaction will also be accretive to net income, diluted earnings per common share, and book value per common share.

We are continuing to pursue our disciplined approach, and we believe that we will continue to see many more opportunities for FDIC-assisted acquisitions.

Let's turn to noninterest expense, which increased 33% in the quarter just ended compared to the fourth quarter of 2009. Our fourth quarter noninterest expense was significantly impacted by several factors. First, we paid general cash bonuses, which included most employees, and totaled $984,000. This bonus was paid based on our exceptional financial results in 2010.

Second, noninterest expense for the quarter just ended included a total of $1.32 million of unusual expenses related to our FDIC-assisted acquisition in December, and completing and preparing persistence conversions related to our various acquisitions last year.

Noninterest expense also included the cost of ongoing due diligence efforts related to our other FDIC-assisted bank acquisition opportunities and $1.83 million to write-down the carrying value of foreclosed real estate.

While we are discussing overhead, let me mentioned that despite our focus on FDIC-assisted failed bank acquisitions, we are continuing our growth in de novo branching strategy. This includes a third banking office in Benton, Arkansas which we in December, and plans to open three new metro Dallas offices in branch buildings we acquired earlier from Wells Fargo Wachovia.

These offices are currently being upgraded and prepared for opening, with a tentative timetable for the new Plano office to open tomorrow, the Carrollton office in February, and the new Keller office in April.

We expect de novo branches to continue to be an important part of our business strategy, but our focus on such strategy will continue to be secondary to our current focus on FDIC-assisted acquisition opportunities.

During the past 17 years our disciplined and focused approach to our de novo branching strategy has allowed us to achieve excellent results. We are now applying that same discipline and focus to the branches of our newly acquired banks, attending to all of the factors that go into making our retail branches customer friendly, efficient and profitable offices.

To accomplish this makeover of newly acquired branches, we are deploying many personnel to the new offices as part of a concentrated effort to not only implement our systems policies and procedures, but also to instill our principles and values. This process is going well at all of our acquired offices.

One of our long-standing and key goals is to maintain good asset quality. Economic conditions have made our traditional strong focus on credit quality even more important. Over the past several years we have dealt with a number of asset quality challenges, and we think we have been relatively successful in handling those issues.

In our last five conference calls we have stated our belief that we are past the midpoint of the current credit cycle, and therefore, we believe that our allowance for loan and lease losses ratio has already peaked. You'll recall that the recent high point for our allowance ratio was 2.19% of total loans and leases at June 30, 2009.

We continue to believe that the 2.19% allowance ratio was the peak for the current credit cycle. And for the past six quarters the ratio has stayed just under the 2.19% level. But over the course of 2011 we expect to see that ratio begin to decline.

I also stated in our January 2010 call, and reiterated in subsequent calls, that widely expected our net charge-offs ratio, our net charge-offs and provision expense to vary from quarter to quarter in 2010, we believe that on average those metrics would show improvement in 2010 compared to the results we achieved in the fourth quarter of 2009. I am pleased to report that in each quarter of 2010 our results for all three metrics did in fact show improvement compared to the results in 2009's fourth quarter, which was the benchmark for our guidance.

We are very pleased with the improving asset quality trend in 2010 as compared to 2009. We are also very pleased to state today that we expect this trend of improvement to continue in 2011. Specifically, we expect our net charge-offs ratio, our net charge-offs and our provision expense to vary from quarter to quarter in 2011. And we believe that on average those metrics will show improvement in 2011 compared to the results we achieved in 2010.

Let me state that another way. In 2010 our net charge-offs ratio was 81 basis points. In 2011 we expect our net charge-offs ratio for the year to be less than 81 basis points, although it may be more than that in a particular quarter or quarters.

Our provision expense in 2010 was $16 million or $4 million per quarter on average. In 2011 we expect our provision expense will be less than $4 million per quarter, although it may be higher than that in a particular quarter or quarters.

Our net charge-offs in 2010 were $15.4 million or $3.85 million per quarter on average. In 2011 we expect our net charge-offs will average less than $3.85 million per quarter, although they may be higher than that in a particular quarter or quarters.

For the past two years we have regularly stated our expectation that the economic recovery would be very subdued. Even assuming a relatively weak recovery, we expect modestly improving results in each of these three asset quality metrics in 2011. The magnitude of the improvement will depend to some degree on the strength of the recovery over the coming quarters.

Our guidance in this regard assumes that the United States does not experience a double dip recession and continues to have some degree of economic recovery.

In closing, let me state that article our goal for the first quarter of 2010 -- or 2011, excuse me -- and we believe it is a reasonable goal, is to achieve net income, exclusive of any bargain purchase gains and related costs from acquisitions, in excess of $12 million. In our view this is now a minimum level of quarterly earnings we would like to achieve.

Of course, we already have one FDIC-assisted acquisition in the first quarter, and we have already stated we expect the transaction to be accretive to net income, diluted earnings per common share and book value per common share.

We certainly hope to do more FDIC-assisted transactions, potentially including additional transactions in the first quarter. And if we do, such transactions may result in significant bargain purchase gains and even higher quarterly net income results.

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

(Operator Instructions). Andy Stapp, B. Riley & Co.

What is a good rate for the effective tax rate in 2011?

That depends on how significantly our income numbers are affected by bargain purchase gains. How many acquisitions we make, assuming we make more, and what they contribute.

Obviously, the income generated by those is all taxable, so that will tend to skew the effective tax rate higher since it will dilute the effect of our investment securities -- tax-exempt investment securities and other tax credits and tax exempt items. So it really very much depends on how many acquisitions we make and what sort of gains we generate on those acquisitions.

Okay, how about exclusive of bargain purchase gains?

Exclusive of that?

Yes.

Greg, do you have kind of a bogey on that?

It is going to be mid to upper 20%s.

Okay, mid to upper 20%s.

That mix of tax-exempt income.

Assuming what we are assuming on a mix of tax-exempt income, you are mid to upper 20%%s.

Okay, and speaking of FDIC deals, how much -- how comfortable are you in bulking up your balance sheet through such deals? In other words, how many -- how much more in assets would you feel comfortable taking on?

Well, if you look at our December 31 balance sheet compared to our September 30 balance sheet, we have -- despite the fact we made an acquisition in December, we have about the same capacity at December 31 to take on acquisitions that we did at September 30.

If you assume we are not going to drop our tangible common equity to tangible asset ratio below say 6.5, and that we are going to keep a Tier 1 leverage ratio of 8% or more, then at December 31 we had about $1.5 billion in asset capacity we could add and still meet those ratios. Of course, we used a couple of hundred thousand of that with our January acquisition.

But the fact of the matter is, and we have discussed this, if we make $2.5 billion in acquisitions or $3 billion in acquisitions, by the time we liquidate the parts of those things we don't want, which we tend to do quickly, and price the loans and OREO assets at fair value, we tend to cut those things by 40% to 50% over just a quarter or two.

So we could really make somewhere between $2 billion and $3 billion of acquisitions and by the time we melt them down, still have net growth in assets of half to 60% of that number. So we've got a ton of room to make acquisitions.

Okay. I think in your last call you talked about that existing REO could be cut in half. Could you talk about the inflows and outflows of REO during the quarter and your expectations going forward?

I don't have hard numbers on that, but we had significant outflows and significant inflows. I think our OREO balance actually increased just a few hundred thousand dollars -- and I don't have the hard number on that -- over the course of the quarter.

But we did sell a lot. I think we had 15 or 20 sales in the last month of the quarter, a lot of small things and a couple of big things. And by big, more medium-sized things. We didn't sell any of our big OREOs in the quarter.

But we had a good flow of stuff out. Unfortunately, we had a good flow of stuff in. The upside of the stuff that flowed in is obviously most of it flowed in from stuff that was on nonaccrual at September 30. So we did have a several million dollar reduction in our nonperforming loan balance from September 30 two December 31. So that stuff moving through the pipeline, getting to OREO, where we can get it sold, is a positive development.

Got you. Okay, thanks. I will hop back into the queue.

Jordan Hymowitz, Financial Corp.

Hey, George, that was a pretty close approximation of our name (inaudible). It is Jordan Hymowitz with Philadelphia Financial. I had a question. You mentioned that Durbin was likely to impact your earnings in the second half of the year. Why is that, because as an under $10 billion asset bank you are exempt from Durban?

Well, your exempt from Durbin, but the interchange fees that you share in that are generated by larger banks, we share in that fee income. It is all an interconnected network. So we are not sure how all this is going to actually play out, so we don't actually know what the impact of Durbin is actually going to be.

And we don't know what the impact of the various proposals from the FDIC is going to be. We've got some internal estimates of those, but those are certainly not good enough numbers to publicize, because that is all still a very fluid situation.

But our approach is basically threefold. Number one, we want to do what we did on the nonrecurring NSFOD fee last year, and that is take all of the proactive steps we can take to preserve a high level of the income we already have. There will be some things that we can do in that regard probably, and some things that are just impossible to deal with as a result of the Durbin amendment and whatever the final guidance from the FDIC looks like.

So we are going to do everything, number one, we can do to preserve the revenue stream we've already got. Number two, we are focused on generating new revenue streams by increasing customer utilization of products and services. And we have had some very good success in that regard. We are very pleased that through a combination of those two factors we had record third-quarter service charge income and record fourth-quarter service charge, despite the changes that went into effect on August 15 of this past year. So we hope to replicate those successes to a large extent in the second half of 2011.

And then the third thing is we are looking at additional fee income opportunities. I think there is going to be a change in fee income across the industry over time as a result of these new regulatory and legislative initiatives.

And we are also looking at overhead. The loss of some of these fee income items is going to affect the profitability of our retail banking model to a small degree, and we are going to look at the costs related to our retail banking model and try to adjust that to the extent we can. Of course, we are extremely efficient already, so it is not like we've got a lot of fat to cut. But we think there are some modest enhancements that we can make on the retail side that will help offset that. So we're working on those initiatives, and hope to have them implemented by the time that the effects take affect in the second half of the year.

George, I don't want to -- I am just confused, because Durbin specifically excludes banks under $10 billion in assets. And Visa has already said they're maintaining a dual system, so I don't understand why there would be any affect of debit interchange on you guys.

Well, Visa has said they're maintaining a dual system. I don't think MasterCard has made a final decision on that as yet. But to the extent that -- you know, the transactions that are originated out there, in a lot of these transactions we share in the merchant fee income as well. And if that all gets reallocated and redistributed among the various participants who share in that merchant fee income pop that will affect us.

Maybe I can follow up later. Then one more quick question is, a number of banks are looking to change their traditional debit cards to prepaid debit cards, which are exempt from Durbin as well. Have you started a pilot program on that?

We have not.

Is it something that would interest you?

It is something that I'm sure is being considered by our retail staff, but we are not taking any actions in that direction at this time.

Okay.

Matt Olney, Stephens.

In 2010 it sounds like the OREO write-down expense is about $9 million -- loan collection, repo costs about $4 million. What are your thoughts on how much these two items will trend down in 2011?

My guess would be that, as I have said already, we expect our charge-off number to go down. My guess is that we would also see a noticeable decline in our OREO write-down expense over the course of the year. What drives that is the ongoing reevaluation of assets. AND as you keep getting appraisals on things we have still been in an environment where real estate assets in a lot of markets have been declining.

We have seen some moderation, or what we think is kind of the bottoming of that trend in a lot of markets, and actually have had some success selling assets at values better than where they were recently appraised for.

So I think that we are also well along, if not well past the midpoint of the process of seeing OREO values decline as real estate values decline I think we are getting to the bottom, and that is what is driving that. We relook at values on essentially every OREO asset every quarter. And if we think the values have moved against us, we keep writing it down.

Also, and I also want to jump over to the margin. I think in your prepared remarks you indicated that the early 1Q acquisition could benefit the margin from just a full-quarter effect of the covered loans.

We will get five-sixths of a quarter effect of the covered loans from the acquisition we made in mid-January. And we will get a full-quarter's effect as opposed to one-sixth of a quarter's effect in Q4 from the acquisition we made in December.

So we picked up a pretty nice chunk of covered loans, and they are high-yielding assets. We discount those things and put a pretty good yield component discount on them because they are rough assets and they deserve a high yield component discount.

So that is a positive factor that I think tends to put a little more upside bias on our net interest margin going into the new year.

So did your comments talking about a more favorable margin in 1Q, did that include other offsetting factors or did that exclude that?

That includes the whole universe of factors -- our legacy loan portfolio, our noncovered loans and securities and cost of deposits as well.

Okay, last question, and I will let somebody else hop on. The bond market, very volatile in the fourth quarter. I think you touched on it in your prepared remarks. Can you give us any color of how you positioned your bond portfolio, especially towards the end of the quarter when we saw yields tick up?

Well, we were a buyer -- we had some bonds that we sold early in the quarter, in October. And we were a limited buyer in November after the market really got pasted the first time or two there, and picked up about $20 million or so of assets -- I think it was $21 million, $22 million of assets that we thought had some pretty good attractive yields on them. I would have been better off we bought them in December instead of November as it turned out.

But, you know, there is a lot of irrational action that was pricing bonds in November and December, and I think that gets worked out as we go into the new year. I realize the market has been similarly turbulent so far in January, but the expectations of a broad-based credit price problem in the municipal bond market in the United States are overblown.

Yes, there are going to be a lot of jurisdictions that have problems, but I think like in the last two years there have been 18 municipal defaults that utilized Chapter 9, and that is a nothing number.

The expectations of broad-based problems in the municipal bond market are overblown. And the rush of supply that came because BABs weren't extended into the new tax year, I mean, that has just created an abnormal supply/demand situation. And there was some selling of munis, because the tax increases that will ultimately come have been delayed for two more years.

So all those factors will tend to normalize and work back out. I think we will see a more healthy underpinning of the bond market when the irrational hysteria fades, and a more realistic assessment of the tax picture and the supply/demand picture and the credit issues related to bond market all get set in somewhere this year.

So I think we are -- if the bond markets slipped any further, we would probably become an aggressive buyer. We are still probably a bit away from where we would actually go in and put a lot of resources into the bond market. Because we have already repositioned the portfolio over the last two years to where we want to be going into a higher rate environment. That higher rate environment is going to come, so we would have to see a little more irrational value in the pricing of bonds before we became a big buyer again.

But I am not uncomfortable where we are, and I do think you'll see valuations return to a little more reasonable level over the next two quarters.

Alright, thanks for the color, George.

Dave Bishop, Stifel Nicolaus.

A question in terms of the loan pipeline and the outlook for organic loan growth as we move into 2011. I know we have seen some of our banks here start seeing some aspects of the green shoots taking hold here. It sounds like you have some of the commercial borrowers becoming a little more less cautious there. I guess what are you hearing from your folks on the lines there? And if you enumerate any goals for 2011 terms of organic loan growth?

Well, we are seeing a lot of application volume relative to what we were seeing say four quarters ago. There is definitely more application volume flowing our way. We are continuing to be very particular about it. And we are originating quite a few new loans.

We booked some very nice pieces of new business in the fourth quarter. And as has been the case pretty much all year long, we got overrun by continued paydowns and payoffs from our existing loan book.

I think we will see positive loan growth. We have budgeted in our internal what we -- what most people would refer to as budget, and we refer to as a plan. We budgeted for our internal plan for 2011 positive loan growth in the -- it is mid-to high single digits, I think, from the organic loan growth.

But our best opportunity for meaningful growth in earning assets in the coming year probably continues to be purchase of covered loans in FDIC-assisted transactions. We are very focused on that. We have had due diligence teams out last week. We've got due diligence teams, I think, out this week. We are continuing to look at transactions on a regular basis. We pretty much looking at something every week it seems like.

I think we are going to make a number of acquisitions this year. I'm optimistic about that. Hopefully we will. And I think that is going to be the largest driver of earning asset growth in 2011. I think the second piece of earning asset growth is probably over the course of the year a mid to high single digit growth in legacy loans originated.

As Matt Olney just questioned, if we get a further selloff in the bond market values would get to a point that they could be compelling, notwithstanding our expectations that we are going to see higher rates ahead. If you just get things so rationally out of wack now, you would have the effect of higher rates built into the purchases. And we would -- we could in that scenario -- I don't think we would get there, but if we do, we could reload the bond book and see some significant benefits from that as well.

Turning back to the acquisitions, the FDI acquisitions, obviously Unity has been on the book for a while there. Has there been any sort of semblance in terms of earning asset growth for those institutions, or are they still primarily -- you are still seeing run-off mode there in the acquired institutions?

We are seeing net run-off in their books. We gave our loan officers at Unity, which was the -- we refer to now as Northwest Georgia -- we gave our Northwest Georgia loan officers loan authority in, I think, November for the first time -- independent loan authority. We felt like they had fully embraced our credit culture and really understood where we were going. As a result, we gave them the keys to the car on some loan authority there.

But the fact of the matter is they are not originating many loans. They have been through a bad experience -- all of these failed banks have. The loan officers have become very conservative as a result of that, which you want. If they went through that experience and didn't become very conservative they're probably not loan offices we kept on the team when we selected our staff there.

The markets that those failed banks are in continue to be very sluggish at best. So they are not operating in an environment that is going to give them a lot of loan growth opportunity.

So we will see at some point, and I would guess it will be a couple of years in those markets, positive loan growth. But I would speculate that in 2011 and 2012 probably the loan portfolios of the acquired banks will continue to shrink as they generate less new loans than they experience payoffs in the covered loan portfolio.

The growth in our loan book is going to primarily come from Texas, North Carolina and Arkansas in the next couple of years. And Texas just continues to be a very strong part of the portfolio. Our loans originated by our Texas offices, excluding covered loans, grew over 1% last quarter. As has been the case in most quarters our Texas offices now account for 36.9% of our total loan book, excluding covered loans, and that is up from 35.9% the prior quarter. If you carry it out another decimal place it is actually a little more than 1 percentage increase for Texas.

North Carolina held steady at about 5.64%. Arkansas declined from 58.3% to 57.3%. So I think we will see mostly continued growth from Texas, to a lesser extent from North Carolina, and still a lesser extent probably from Arkansas, as the three sources that grow our legacy loan book going forward. And that just reflects the underlying fundamental strengths of the Texas economy.

Thank you, George.

Derek Hewett, KBW.

While we are on Texas, a quick question on the large Dallas Central BUSINESS District OREO. Any sort of write-downs on that yet or is that still -- you're still holding onto that at your original loan balance?

We are carrying that at our original balance of $17.9 million. And we've got three appraisals on it that have been done within the last two years. The appraisals range from, I think, $23 million to $29 million. I haven't looked at them in a while, but they are all considerably higher. When we booked it into OREO we wrote it down to well under the appraised values.

We have had the thing under contract a couple of times to sell. Value has not been an issue. The issue has just simply been the buyer's ability to put together all of their equity in it. And both times that we have had it under contract to sell the buyers got a large chunk, but not all of their equity put together, and hence we have not closed a sale. But the value has just not been an issue at where we've got it marked, so we're very comfortable with our value on that asset.

We had talked about, in response to a question, about that asset last quarter. We had indicated we did have a contract on it. We gave it a 50-50 probability of closing, and unfortunately it fell on the 50% of not closing side of that odds.

Again, it was just due to the equity. The borrower -- the buyer was able to put together, I think, about half of their equity or a little more, and just couldn't get the rest of the equity piece put together. It is a tougher market in which to raise equity than it was a few years ago.

We have another seriously interested party in it now. We are not under contract. We are having what I would say late-stage negotiations pre-contract. I don't know whether we get it sold or not. But there continues to be a high level of interest in it. It is a very valuable track and at some point we will get it sold.

Okay, great. Thank you very much.

Andy Stapp, B. Riley & Co.

You talked about elevated due diligence costs. Do you know roughly the amount of those costs that you are bearing per quarter?

I didn't break that out, but we probably got five guys at a time out probably 10 times or more a quarter, and their air fares and hotel rooms and so forth. So is not a modest expense. We are spending some money looking at these things.

Got you. Do you have the balance of 30- to 89-day delinquencies at year end?

It was 2.02%. 30 to 89?

Yes.

Well, our 30 and more that includes --.

Right, I saw that.

Yes, that includes non-accruals and everything is 2.02%. So 30 all the way to infinity is 2.02%. That number was up 12 basis points from the September 30 of 2010 number. It was up 3 basis points from a year-ago's number, so it was up a little bit.

Strange things sometimes cause those numbers to be elevated. We would have actually been down between the numbers for 12/31/09 and 9/30/10, but for a lady who went into labor prematurely. We had an asset that was sold. And the Chief Financial Officer of the buyer went into labor a month early, so the transaction closed in early January instead of the day before the end of December, which would have taken that asset out. And if it had been out, we would have been somewhere probably 5 or 6 basis points lower there. So strange things move those numbers around sometimes that have very little to do with credit metrics.

Okay. And lastly, do you have the run rate for your monthly interchange fees?

I do not have that at my fingertips here. We can get that though.

Okay.

You can grab that, Greg. I think our total debit card fees are about $250,000 a month. Is that --? That is not a number I keep on the top of my head. We will come back to you on that.

Okay, great. Thank you.

Brian Martin, FIG Partners.

Congratulations on the quarter. George, just the -- you talked about the FDIC deals. Can you just give any sense if now that you have done enough of these your outlook, as far as where you're looking, is a little bit more strategic or are you still looking at -- it sounds like you're still looking at multiple markets as opposed to just focusing on a handful. But can you just give any color on just if that has changed where you're looking or is it still across the board?

That has not changed at all. We are still looking at Arkansas and Texas where there have been very few opportunities. And then, of course, states around Arkansas and Texas, we are looking at, although it is a real tertiary sort of focus for us there in Oklahoma and Kansas and Missouri. The other states that are really more of a secondary focus after Arkansas and Texas are Tennessee, Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. So it is the same states we have been talking about for two years.

Okay, and the conversion costs for the transaction done in January, I guess some of that was put into this quarter, but there will be more in the first quarter? Is that what you --?

No, there is nothing in Q4 related to the January conversion. I think we accrued and prepaid -- when you lock down your conversion dates you pay for the large part of the conversion costs. And I think we accrued for most of the rest of the conversion costs related to the December acquisition in December. But there is nothing in December for the January acquisition.

So we will have a gain we would expect on the January acquisition, offset to some degree by the costs related to conversion and other acquisition-related costs on the January acquisition. But everything related to the December acquisition is pretty much in December. There will be some follow-on conversion costs that you incur that weren't accrued and so forth. But a large chunk of that was accrued in December, but nothing is in December for the January acquisition.

Okay, and then just lastly, just on your expectations -- and you talked about the loan side -- but just as far as your organic deposit growth, what are your thoughts for 2011 relative to that?

Well, my thoughts for 2011 is we can grow deposits just within reasonable limits as much as we want to. If we wanted to grow deposits $1 billion, that would be no problem. We've got the pricing on deposits tightened down very tight, and are not spending a lot of resources on business development deposits, because honestly we are flooded with cash. We've got more deposits and liquidity than we -- cash needs then we really need. So growing deposits is not a problem.

Right, okay, thanks.

When we are acquiring these banks we are breaking rates on all their deposits and bringing them into our deposit pricing culture literally from the get go.

Okay, all right, thank you.

Andy Stapp, B. Riley & Co.

Andy, I think I have your number. I think our assumption of about $250,000 a month is pretty much indicative of our ATM fee and debit card fee, which is combined in the way we calculated. So that is all of our merchant interchange fees, it is all of our ATM fees, it is all of our debit card fees all lumped together. So some elements of that are affected by the Durbin amendment and some -- it is actually, I guess it is more like $275,000 and $3.3 million for the year. So it is about $275,000 a month is the -- $275,000 a month is that number.

And you mentioned that you are seeing signs of stabilization in real estate values. What are you seeing in regard to raw land?

Well, it very much depends on the market. If you're talking about raw land prices or lot prices or home prices in the metro Dallas area, you are seeing actually positive tones in a lot of those things. If you're talking about more distressed markets, you are continuing to see some pressure on those.

As we have acquired these banks in distressed markets we have developed an even greater appreciation for the markets that we are in, because you look back at the appraisal histories on these assets as you are liquidating them or working them, and you just see a year-to-year just collapse in appraised values that seems to be ongoing.

But even in those more severely impacted markets in Georgia, Florida, South Carolina, North Carolina, things seem to in a lot of cases be reaching bottom numbers. If you get realistic appraisals on things and have had realistic appraisals the past year, you can see a trend of things sort of appearing to bottom out in those markets.

So that is encouraging to me as we -- of course, those portfolios are covered by loss shares, and we have been very conservative in how we value those things, so we are not concerned about our valuations in those markets, because we do have will loss share and we have been so conservative in how we value them at purchase.

But nonetheless it is positive from a macroeconomic point of view to see what appears to be in a lot of those markets a bottoming and a firming of demand. I think a lot of those markets have reached prices were a lot of folks will say -- we will buy at these levels. This is cheap enough to lure us into the market, even though it is still a challenged market. So I think there is a much more positive trend nationally than there was several quarters ago.

In Arkansas is raw land value stabilizing there?

I would say our values have been very solid on a relative basis, relative to the rest of the country everywhere in Arkansas, except Northwest Arkansas. A large part of our OREO write-downs have just continued to be in Northwest Arkansas.

What is really driving those valuation assumptions in Northwest Arkansas is not that things are getting any cheaper, because they have gotten -- I think people have come to grips with how severely deflated values were up there, but what is really, I think, adjusting the valuations on things is people are thinking -- boy, I thought there would be a three-year-old or a five-year hold and now it is a seven-year or 10-year old.

It is just the absorption rates have gotten so low up here that even though the values have probably reached near bottoms on a transaction by transaction basis, there is so much supply that when you factor in realistic holding periods on it, given the volume experience over the last couple of years, it just deflates the values in a net present value basis substantially. That is the way we carry our stuff is on a net present value basis.

So if you've got an asset and you think I'm going to sell it for $100,000, and a quarter later you still think I'm going to sell it for $100,000, but your assumption was before you are going to sell it in two years for $100,000, and now your assumption is you're going to sell it in five years for $100,000, that changes the value a bunch. That has been one of the big drivers in the deflation of the values up there.

Okay, thanks. Nice quarter.

Dave Bishop, Stifel Nicolaus.

George, just to follow up, and bear with me here, you may not be able to answer this specifically, but there is a competitor in your neck of the wood there in Arkansas that has been struggling there from a credit perspective. Any update on what their status is in terms of [what] fundamental performances has been doing up there, or any updates in terms of what they are seeing out of that bank?

I would say two things about that question is, number one, we don't spend a lot of time looking at other banks' financial results. We focus, and I have said this a number of times, and you have heard me say it a number of times, we focus on our customers, our business and what is going on in our universe. We let other banks do their thing, and row their boat.

The second thing I would tell you is that our hope is that not one single Arkansas bank, beyond the one and two that I guess have already failed, fails. We will look at any opportunity that comes up that is relevant to us in our markets, but we are hoping that our competitors, even though they are competitors, do well and thrive and that none of them go by the wayside.

Got you, thanks.

Peyton Green, Sterne Agee.

Good morning. Congratulations on a great year. George, I guess, my main question is just competitively how do you see things going into '11 and '12? It has been a relatively soft period certainly for loan growth for Ozark and it's history. I'm just wondering if you could give a little bit more color on what you would expect. Do you feel like you can get positive organic growth in '11?

Well, as I said, we are modeling in our plan mid single digit to high single digit organic loan growth, but we think that is going to be secondary to the growth that we are going to get in average earning assets from the addition of covered assets. So I don't know what I can add to that.

We are seeing a lot of new business opportunities. We are booking a lot of new business opportunities. That just played out last year that our paydowns and payoffs from loans outran our new business production and we had a several basis point shrinkage in our portfolio over the course of last year as a result of those brisk paydowns.

You know, that is not all bad. Some of the things that we got big paydowns on were things that you expected to get big paydowns on. And what if we hadn't gotten the paydowns you would have said, wow, I am concerned we didn't get a pay down on that.

So we are actually quite pleased with the way everything is playing out and working out. And I am not terribly concerned about whether we get organic growth in Q1 or Q2 or Q4 or when that actually kicks back in. It will kick back in.

We are just going to continue to be very careful, as we have been, and it has been very profitable for us to be very careful. We're going to continue to look for great opportunities to add assets in covered transactions with loss share coverage from the FDIC at very conservative values that we can make really good yields on and have little or no concern about any future risk profile from those. And expand the franchise in the process for free.

So we feel like we had a fantastic year in 2010. We think the opportunities are going to be as plentiful in 2011 as they were in 2010. In fact, one of our goals is to make at a minimum in 2011 -- and we've got to have opportunities to do this, but we think they will be there. Our goal is to make at least as many acquisitions in 2011 as we did in 2010. And if we could double or triple that number we would -- we certainly got the capital and the managerial resources to do that. So we are going to be very active in looking for those opportunities.

So I am not terribly concerned about organic growth until we get to some later point in the bank acquisition cycle here.

Okay, and then just a housekeeping question. How much was OREO expense in 2010 versus '09? And I don't know if you have this breakdown, but how much of it was related to the write-down of carrying values?

I don't have that number. We will have that number in the MD&A in the Annual Report, and it will be broken down; we break it down in there on that basis. So there was too much of that expense, I will tell you that. But we will -- that number will moderate over time, and hopefully will moderate noticeably in 2011.

Okay, great, thank you.

Now, I do want to add one clarifying comment. We've got a great team of loan officers and they are striving every day to make every good quality, good yielding loan they can make. So we are actively striving to grow our loan portfolio. I don't mean to imply to those loan officers or to our investors that we are not striving to grow our organic portfolio.

We are just going to continue to be very cautious, very conservative in what we do. And because we think there are so many opportunities to add earning assets with a FDIC guarantee on them, at a deeply discounted price, with very high yields, we are not feeling any sort of pressure to go out and say -- oh, we've got to do something excessively aggressive to grow loans. Because I think we're going to get plenty of growth from covered asset growth, and that is high-yielding, high-quality growth, when you consider the loss share guarantees on it.

And what growth we get from our organic portfolio is certainly desirable, and something we are seeking, but we will get our earning asset growth, I think, even without that. Next question.

There are no further questions in the queue at this time, sir.

Alright, there being no further questions at this time, thank you for joining our call. We appreciate your interest in our Company, and we look forward to talking with you in about 90 days. Thank you very much.

Thank you. This does conclude today's conference call. You may now disconnect.