Bank Ozk (OZK) 2011 Q2 法說會逐字稿

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I'm Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the Company's results for the second quarter of 2011 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 outlooks. To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates, and outlooks for the future including statements about economic, real estate market, competitive, credit market and interest rate conditions, revenue growth, net income and earnings per share, net interest margins, net interest income, non-interest income, including service charge income, mortgage lending income, trust income, net FDIC loss share accretion income, other loss share income, and gains on sales of covered ORE.

Non-interest expense, our efficiency ratio, asset quality and our various asset quality ratios, our expectations for provision expense for loan and lease losses, net charge off and our net charge off 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, our goal of making additional FDIC assisted failed bank acquisitions and opportunities to profitably deploy capital. 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 captions 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. In case you listeners like us here in Little Rock did not hear the introduction to the call, this is the Bank of the Ozarks' second quarter earnings conference call and we welcome you to it. It's good to have you with us this morning.

We have the privilege today of reporting exceptional results for the quarter just ended. Obviously our 2 FDIC-assisted acquisitions during the quarter resulted in large gains, but more importantly, our results from day-to-day operations improved very nicely during the quarter. This improvement was evident in our record second quarter net interest income. As you know, net interest income is traditionally our largest source of revenue and is a function of both net interest margin and the volume of average earning assets, both of which increased significantly in the quarter just ended. This combination helped us achieve record quarterly net interest income of $42.5 million in the second quarter giving us our fourth consecutive quarter of record net interest income. In fact our second quarter net interest income increased $6.4 million or 17.7% from the immediately preceding quarter.

Over the last 3 years we've had very favorable improvements in our net interest margin. This improvement continued in the quarter just ended as our net interest margin increased to 5.80%, up 19 basis points from the immediately proceeding quarter and up 70 basis points from last year's second quarter. This notable improvement was a result of several factors including increased yields on covered loans, increased yields on non-covered loans and leases and decreased rates on every category of interest bearing deposits and repurchase agreements. Compared to the immediately preceding quarter, our yield on covered loans increased 40 basis points and our yield on non-covered loans and leases increased 1 basis point, giving us a 12 basis point overall improvement in our yield on earning assets. At the same time, we lowered our interest rates on all 3 categories of interest bearing deposits, giving us a 6 basis point reduction in our cost of deposits and a 9 basis point reduction in our overall cost of interest bearing liabilities.

Our outstanding second quarter net interest margin resulted from a team effort. Our deposit pricing committee has done an excellent job of understanding our markets and our competition while focusing on profitability. Over the last several years, our retail banking team has done great work at dramatically improving the mix and the profitability of our deposit base. Our lending and leasing teams have continued to achieve excellent pricing on loans and leases in our legacy markets, and our teams working on FDIC-assisted acquisitions have added large volumes of covered loans with excellent yields.

Our volume of average earning assets increased $318 million in the quarter just ended compared to this year's first quarter. This growth was primarily attributable to the $251 million increase in the average balance of covered loans and the $89 million increase in the average balance of taxable investment securities. These were partially offset by an $11 million reduction in the average balance of tax exempt investment securities and a $13 million reduction in the average balance of non-covered loans and leases. Of course the increase in the average balance of covered loans is a result of our sixth and seventh FDIC-assisted acquisitions on April 29. As we have stated previously, we are very pleased with all of our acquisitions to date and we continue to be very actively involved in evaluating opportunities, performing due diligence and bidding. We certainly hope to do more FDIC-assisted transactions this year and next year and we believe this window of opportunity may extend into 2013.

As you will recall, during the first quarter of 2011, we were a net seller of investment securities to a small extent. In the second quarter we added a significant number of taxable investment securities with our Park Avenue acquisition, even though we continue to be a net seller of tax exempt investment securities to a small extent. The taxable securities added in the Park Avenue acquisition were almost all Ginnie Mae securities with short to medium terms and fairly modest yields. Originally, we expected to retain these securities, mostly due to the extra liquidity they provided; however with the significant rally in treasury securities in June, the takeout yields on these Ginnie Mae's reached a point where we felt it was prudent to sell at least some of the securities. The sales resulted in a small amount of securities gains in the second quarter. We've continued to sell small portions of this portfolio over the last 2 weeks.

As we've discussed in recent quarterly conference calls over the past 2 years, we have reduced the size of our investment securities portfolio as a result of our ongoing evaluations of interest rate risk and also to free up capital for FDIC-assisted acquisitions. During the quarter just ended, we originated a decent volume of new loans and leases, but once again, our origination volume was more than offset by pay-offs resulting in a small reduction in our volume of non-covered loans and leases during the quarter. We are extremely well positioned from a competitive perspective to gain market share and economic conditions have improved to the point that we should start seeing positive loan and lease growth.

Our conservative credit culture has served us very well for many years and especially throughout the recent economic downturn. We do not intend to liberalize or deviate from that credit discipline at all; however the severity of the recent recession has caused some of our lenders to be overly cautious and it is time for those lenders to become more offensive-minded. We want to capitalize on our strong financial and competitive position to add new customers and build quality relationships. Further, with our exceptional net interest margin, we can afford to be somewhat more aggressive on pricing. With an increased focus on growth, we believe that we can both adhere to our traditional conservative credit principles and achieve our goal of net growth of $20 million per month on average in our legacy loan and lease portfolio in 2012.

Our goal is to increase that growth to $30 million per month on average in 2013. However, we continue to believe that our best source of growth in earning assets this year and in 2012, and perhaps even in 2013, will be covered loans from additional FDIC-assisted acquisitions. We expect these acquisition opportunities will diminish during 2013 and then organic growth will once again take center stage in growing earning assets. To accomplish the organic growth that we want in 2013 and 2014, it is necessary for us to gain momentum this year and to accelerate that momentum further in 2012 and 2013.

Let's shift to non-interest income. Income from deposit account service charges is traditionally our largest source of non-interest income. Service charge in the quarter just ended increased 19.5% compared to this year's first quarter and 16.6% compared to the second quarter of last year. This is a testament to the success of our retail banking team at adding large numbers of new core deposit customers over the last year, both through organic growth and acquisitions, and also increasing customer utilization of various fee based services. As we have discussed in recent conference calls, we are facing regulatory and legislative headwinds in regard to service charge income. The FDIC has issued guidelines which reduce NSF/OD fee income starting January 1 of this year. In addition, the Durbin Amendment dealing with debit card interchange fees and the Federal Reserve's recent rule limiting such fees may affect us at some point; on their face the Durbin Amendment and the Fed's implementing rules apply only to banks of $10 billion or more in size, but there's concern that interchange income for all banks will ultimately be diminished.

We've implemented the new FDIC guidelines on NSF/OD charges effective for this current quarter and we've also implemented measures to mitigate, at least in part, their impact on our service charge income. To date, we have focused on expanding customer utilization of various fee generating products and services and selectively increasing certain fees, but these actions will not fully offset the revenue that we are likely to lose. We've also implemented certain overhead reductions but it is difficult to see the results of those actions on our overhead expense due to the significant acquisition and conversion cost and additions of new staff and offices.

At this point, it is difficult to precisely quantify the impact of the recent regulatory changes and other changes that we have made on our service charge income, but we expect service charge income in the third quarter to be somewhere between the first quarter's $3.8 million and the second quarter's $4.6 million. Mortgage lending income in the quarter just ended was down 22.2% from last year's second quarter and down 6.9% from this year's first quarter. 2 factors contributed to these results. First, refinancing activity is down this year due to the volume of mortgages that have already been refinanced and second, our volume of home purchase financing reflects the subdued housing market conditions. You may recall that mortgage activity in the first half of last year benefited significantly from federal tax credit programs.

Trust income increased 1.1% in the quarter just ended compared to last year's second quarter and increased 2.7% from this year's first quarter. Our sluggish growth in trust income this year compared to our growth in recent years is primarily due to a reduction in corporate trust income. A large portion of our corporate trust income is derived from fees earned for services in connection with new municipal bond issues. As you're probably aware, municipal bond issuance has been at very low levels nationally, so far this year.

Net gains from investment securities in the quarter just ended were $199,000, compared to $2.052 million in the second quarter last year. For the first 6 months of this year, net gains from investment securities were $351,000 compared to $3.749 million in the first 6 months of 2010. Of course we were a much more active seller of investment securities in the first half of last year.

Net gains from sales of other assets were $705,000 in the quarter just ended compared to $38,000 in last year's second quarter. For the first 6 months of this year, net gains from sales of other assets were $1.112 million compared to net losses of $35,000 in the first 6 months of 2010. Net gains realized in the first 6 months of this year were primarily attributable to gains on sales of covered other real estate assets. When we acquire OREO and FDIC-assisted acquisitions we mark those assets to estimated recovery values and we then discount those estimated recovery values to a net-present value, utilizing an appropriate discount rate.

Unlike covered loans, the net-present value discount on covered OREO is not amortized into income over the expected holding period of the covered OREO. Because of this, a sale of covered OREO, if sold in a transaction producing net proceeds exactly equal to the proceeds expected, will result in a gain on sale equal to the amount of the net-present value discount. We discussed this in last quarter's conference call and we mentioned this again to point out that while gains on sale are normally considered an unusual item, we are very likely to see a fairly steady stream of gains on sale in future quarters. This has been evident in each of the last 4 quarters and is because of the accounting associated with covered OREOs, specifically the non-accretion of the related net-present value discount.

In the quarter just ended, we recorded $2.9 million of income from accretion of our FDIC loss share receivable net of amortization of our FDIC call-back payable. As part of our FDIC-assisted acquisitions, we record a receivable from the FDIC based on expected future loss share payments and we record a claw-back payable to the FDIC based on estimated sums we expect to owe the FDIC at the end of the loss share periods. The FDIC receivable and the related claw-back payable are discounted to net-present value utilizing a 5% per annum discount rate. The net discount amounts are then accreted into income over the relevant time periods, and in the quarter just ended the resulting net accretion was $2.9 million.

This accretion income will be an ongoing source of income for us for as long as we are under the loss share agreements. Of course, as loss share winds down over time, the amount of net accretion income will tend to diminish but we believe that the $2.9 million recognized in the quarter just ended is a reasonably good starting point for estimating this number for the next several quarters. This amount has increased in each of the last 5 quarters as we have made additional acquisitions.

In addition, non-interest income in the quarter just ended included other loss share income of $1.0 million. This line item includes certain miscellaneous debits and credits related to the accounting per loss share assets, but it consists primarily of income recognized when we collect more money from covered loans than we projected that we would collect. We refer to these additional sums collected as recovery income. Since we tend to be conservative in the way we valued covered assets, which is certainly appropriate given the uncertainty surrounding many of those assets, it is likely that this other loss share income item will continue to be a recurring income item and potentially a meaningful income item as it has been in recent quarters. Because it can be significantly impacted by pre-payments of covered loans, other loss share income will vary from quarter-to-quarter.

During the quarter just ended, we benefited from pre-tax bargain purchase gains totaling $62.8 million on our sixth and seventh FDIC-assisted acquisitions. During the second quarter of last year we had no such gains. The substantial gains in this quarter just ended reflect the combined size of the 2 acquisitions during the quarter and our conservative bidding philosophy. We believe that our accounting including our valuations for covered loans in connection with all 7 of our acquisitions has been appropriately conservative. You can see our conservative philosophy in 4 items in our income statement.

First, the 8.80% effective yield on our covered loans in the quarter just ended reflects the substantial discount rates we utilize to determine the net-present value of covered loans. Second, the significant net accretion income from our FDIC loss share receivable reflects the 5% discount rate we utilize to discount those assets to net-present value. Some banks are using discount rates as low as 2%. Third, our other loss share income, mostly recovery income as we've discussed earlier, reflects the fact that we have been successful to date in recovering more uncovered loans than we predicted we would recover when we originally valued those assets. And fourth, our gains on sales of other assets for the reasons already discussed reflect the conservative accounting for covered OREO assets.

There's continued to be significant dialogue and commentary to the effect that the opportunity for profitable FDIC assisted acquisitions has largely passed. The profitability metrics of our 3 transactions this year suggest that very favorable acquisitions can still be made utilizing our approach, which involves actively looking at numerous opportunities in a number of states while being conservative in underwriting and bidding. This strategy has resulted in us being the winning bidder on approximately 1 out of every 7 or 8 opportunities on which we've bid.

We have stated from the beginning that we would do our due diligence, maintain our discipline in underwriting and bidding, and pursue transactions with a view to making profits on both the acquisition and the ongoing operation of the acquired assets. We are maintaining that disciplined approach and we believe we will continue to see many opportunities for FDIC-assisted acquisitions. Before we leave that subject, we would like to discuss the franchise that we are building in our 5 new states.

First, let me note that we have primarily looked or planned to look at acquisitions in Arkansas, Texas, Oklahoma, Kansas, Missouri, Tennessee, Virginia, North and South Carolina, Georgia, Florida and Alabama. By looking at 12 states, and that number could increase, we have seen many opportunities and thus have been able to be conservative in our bidding. This has allowed us to purchase all 7 of our acquired banks at prices that have generated initial gains and operating profits from the first business day following acquisition. If we were concentrating on a single state or just a couple of states we would have had to have either made fewer acquisitions or had to have been much more aggressive in our bidding.

Second, we believe that we can be profitable and efficient with a single office or a small number of offices in a given market. For example, we've operated a single office in Charlotte, North Carolina for more than a decade and it has been a profitable and important part of our Company. The same could be said of the 2 offices we initially operated for several years in the Metro Dallas area.

Third, we now have 29 Georgia offices from 6 different acquisitions and we are already starting to connect those acquired franchises both geographically and by coordination and consolidation of various functions. While we believe all of the acquired offices can be successful as they currently stand, it is more likely that we will continue to connect more of the current individual offices or groups of offices into larger cohesive networks to additional FDIC acquisitions or subsequently through de novo branching and traditional M&A activity.

The final point that we want to reiterate related to FDIC-assisted acquisitions is our focused approach to instilling our staff at these offices not only our proven processes, procedures, policies and practices but also our commitment to ethics, integrity and excellence in everything we do. We want each acquired office to perform at the same high level that we expect of each of our legacy offices. To achieve both the desired evolution in business practices and the revolution in culture, we are spending significant resources on both training and cultural integration of these offices. These efforts have contributed to the increase in our non-interest expense over the last year, but we believe these expenditures will produce great returns in the future.

With that said, let's turn to non-interest expense which increased 66.7% in the quarter just ended compared to the second quarter of 2010. Our second quarter non-interest expense was significantly impacted by several factors. First, we incurred $2.9 million in acquisition and conversion cost in the second quarter of 2011 compared to $0.5 million in the second quarter last year. Second, write-downs on other real estate owned totaled $4.8 million in the second quarter of 2011 compared to $2.8 million in last year's second quarter. Each quarter we review the carrying value of every OREO asset and we adjust those values downward as necessary to reflect re-appraisals, reduced listing prices or deterioration in market conditions. In addition, we have systematically and aggressively written down the carrying value of assets which we think will have extended holding periods. In many cases these write-downs have reduced carrying values to well below appraised values. Our philosophy is if we expect to sell it over an extended period, we want to be carrying it at an extremely conservative valuation.

In addition in the quarter just ended we recorded a $1.25 million impairment charge related to our only equity investment in a real estate development project, reducing the carrying value of such investment to $1.29 million. Non-interest expense also included the cost of having 113 offices and 1,104 full-time equivalent employees at June 30 this year compared to just 78 offices and 764 full-time equivalent employees at June 30 last year. Of course non-interest expense also continued to include the cost of ongoing due diligence related to potential FDIC-assisted acquisitions.

One of our longstanding and key goals is to maintain good asset quality. Economic conditions have made our traditional strong focus on credit quality even more important. For the past 21 months, we've stated our belief that we are past the mid-point of the current credit cycle, and therefore we believe that our allowance for loan and lease losses ratio for the current credit cycle peaked at 2.19% of total loans and leases on June 30, 2009. For the past 7 quarters, the ratio has stayed under that 2.19% level but over the remainder of 2011 and in 2012 we expect to see that ratio decline further.

In this year's January conference call, we stated that although we expected our net charge-off ratio, our net charge-offs and our provision expense to vary from quarter-to-quarter in 2011, we expect that these metrics on average would show improvement in 2011 compared to the results achieved in 2010. In 2010, our net charge-off ratio was 81 basis points. In January of this year we stated that we expected our net charge-off ratio for 2011 to be less than that 81 basis points, although it could be more than that in a particular quarter or quarters. For the first half of 2011 our annualized net charge-off ratio was 79 basis points, in line with our guidance.

Our provision expense in 2010 was $16 million or $4 million per quarter on average. In January of this year, we stated we expected our provision expense would be less than that $4 million per quarter in 2011, although it could be higher in a particular quarter or quarters. Our provision expense in the first half of this year has averaged $3.0 million per quarter, in line with our guidance. Our net charge-offs in 2010 were $15.4 million or $3.85 million per quarter on average. In January of this year we stated that we expected our net charge-offs would average less than $3.85 million per quarter in 2011, although they could be higher in a particular quarter or quarters. Our net charge-offs in the first half of 2011 averaged $3.56 million per quarter, in line with our guidance. We continue to believe the guidance we gave in January for all 3 metrics is appropriate.

In January, we stated our belief that the magnitude of any improvement in these 3 metrics will depend to some degree on the strength of the economic recovery during 2011. Our guidance continues to assume that the United States does not experience a double-dip recession and continues to have some degree of recovery. At June 30, 2011, our non-performing loans and leases total $19.6 million, an increase of $5.6 million from March 31 of this year. Foreclosed assets held for sale and repossessions at June 30, 2011 were $36.3 million, a decrease of $3.5 million from March 31 of this year. In total, our net increase in non-performing assets during the quarter just ended was $2.1 million. As discussed in the Press Release, $3.8 million of our non-performing loans and leases and non-performing assets at June 30, 2011 related to 2 loans on which the borrower has subsequently paid all interest, made a principal reduction, established a reserve for future interest and taxes and executed extension documents. These 2 loans are now fully current and have returned to accrual status. If the extensions of these loans had closed prior to quarter end, our total non-performing assets would have declined $1.7 million during the quarter just ended instead of increasing $2.1 million.

Our 30 day past due ratio at June 30, 2011 increased 28 basis points to 2.47% compared to 2.19% at March 31 this year. The 2 loans just mentioned, which are now fully current, accounted for 22 basis points of our June 30 past due ratio. Our provision expense in the quarter just ended was $101,000 less than our net charge-offs for the quarter, but our allowance for loan and lease losses at both March 31 and June 30 of this year held steady at 2.17% of total non-covered loans and leases. We expect positive growth in our loan and lease portfolio over the final 2 quarters of this year, and therefore our allowance level is not expected to decline further because of portfolio shrinkage. On the other hand we expect asset quality will show an improving trend over the remainder of 2011, which should result in some reduction in our overall level of allowance for loan and lease losses.

Before we close today, we want to offer a few comments about the recent growth in our capital, which has increased significantly through retained earnings in recent years. For example, our book value per common share has increased 116% over the last 4.5 years from $10.43 per share at December 31, 2006 to $22.53 per share at June 30, 2011. Essentially all of this growth is through retained earnings. This would be a noteworthy accomplishment in normal times but is particularly gratifying considering that we have been through the most severe economic downturn since the Great Depression.

As a result of our substantial retained earnings we have surplus capital. Our common stock holders equity to total assets ratio at the most recent quarter end was 9.58%, even after making 7 acquisitions in the last 6 quarters. We believe that we will have numerous opportunities over the next several years to profitably deploy our team related capital and that the most immediate capital deployment opportunity continues to be additional FDIC-assisted acquisitions. The second most immediate opportunity is expected to be positive growth in our loan and lease portfolio which we hope to see very soon. A third opportunity will likely come when interest rates increase significantly and we consider it timely to reload our investment securities portfolio. The fourth opportunity we see for capital deployment relates to traditional M&A activity, which may provide favorable opportunities for us in the future.

In closing, let me state that our goal for the third quarter of 2011, and we believe it is a reasonable goal, is to achieve net income exclusive of any market purchase gains and related costs from acquisitions in excess of $14 million. In our view this is now the minimum level of quarterly earnings we would like to achieve. We certainly hope to do more FDIC-assisted transactions and if we do more, 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?

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

Great quarter.

Thank you, Andy. I'm so glad that you're asking a question because since the call didn't get introduced today I was concerned there was no 1 out there.

Got you.

What's your question?

When do you expect the conversions for your 2Q deals to be complete and how much do you anticipate in cost saves?

Andy, I don't have a cost save number for you. We will convert the First Choice offices to our operating systems, we'll complete that conversion the first weekend in August and the conversion of our Park Avenue systems occurs the second weekend in September, so we are moving forward with those conversion processes. There will be some cost savings as a result of that. I don't have a number on that. I apologize.

Okay, and has the Oglethorpe conversion taken place?

Yes, we converted Oglethorpe the weekend following our acquisition to First Choice and Park Avenue, so a lot of our deployment team members who are on the conversion and post conversion team at Oglethorpe worked a week at First Choice and Park Avenue offices and then loaded up on Friday and headed to Oglethorpe to complete that process. So, that is done and went very well.

Okay, good. And there's been a lot of negative economic news of late. What are you seeing in your footprint?

Well, certainly, the recovery is as we expected; very subdued recovery. My guess is that continues. I would say we've continued to see more positive signs in most of our footprints, particularly Arkansas and Texas and I would put a particular emphasis on Texas there.

I think things are gradually getting a little better across the country and Texas is probably the strongest market that we have. We said several years ago when the recession was still in its early stages that we thought the recovery would be the equivalent of crawling down the sidewalk bloodied and battered after falling from a 10-story window.

The recovery has not been much better than that, and I think that continues and that's what we really modeled and prepared for in the conduct of our business. So, it's going as expected and Texas is the brightest of the bright spots, although everything is fairly subdued.

And can you provide some color on the link quarter increase in REO expenses?

As far as the write-downs?

Yes, yes.

We were very aggressive in our writing those things down. We certainly have communicated in a number of calls for quite some time that we're being very aggressive and the way we're revaluing those assets. I think the values we had on the books before the write-downs were largely defensible but at the same time, we want to sell those things more quickly.

And if you want to sell them more quickly, you adjust your prices down to a lower level and market them more aggressively, and if it's assets that as I said in my prepared remarks, if it's assets you think are going to be sold over a long period of time. For example, we have got a couple of subdivisions in which we have large numbers of lots and we're selling those lots and making progress selling them and getting our prices for them, but we're going to hold them for such a long period of time before they all get sold out, it's going to take years to sell all that stuff out.

I want to be carrying them at an extremely low value if we're going to carry them for an extended period of time. So, we're just being very conservative and we're fortunate enough to have such strong earnings that we can afford to be very conservative in the values we put on them and very aggressive in the way we write them down.

Sure. But, this quarter was the highest quarter in at least a year and a half. Is this a good run rate or do you think this was unusually high, can you provide any color in that regard?

I would say this quarter was probably unusually high.

Okay. Thanks. I'll hop back into the queue.

Matt Olney, Stephens.

George, I wanted to go back to your comments about your loan growth goals in 2012 and 2013. Want to make sure I heard this right. So $20 million per month in 2012 and $30 million per month in 2013; is that right?

Yes. Those are minimum goals and that's an average goal. We'll certainly have months I would suspect that we'll be less than that but our goal is to get to a minimum $20 million average growth rate in 2012 and $30 million in 2013 and I didn't say it in my prepared remarks, but really, our goal is to amp that up another $10 million to $40 million in 2014.

And we've basically been spending a lot of time late last quarter and early this quarter on really modeling our balance sheet and projecting our balance sheet out for what happens in a post-FDIC acquisition environment, because as you can clearly see, a large percentage of our earning assets are now consisting of covered loans.

And while those covered loans will not run-off in an exact linear fashion, probably a pretty good approximation of the life of those loans we think is if you want to just get a pretty good approximation of the life of them, we think is to assume sort of a linear run-off over a 4 to 5 year period.

So, if you took our balance of covered loans at June 30 and just assume a ratable decrease of those balances to 0 over a 4 to 5 year period of time, I think you would have a fairly decent approximation of what we think the life of those loans will look like. And we are also looking at the yields on those loans.

We're looking at the yields on our legacy loan book and what we are trying to model and calculate is what it takes for us to have record earnings, if we make our last FDIC acquisition in 2013, what it takes for us to have record earnings in 2013 and 2014 in a post-acquisition environment, and that has resulted in us establishing these growth goals and we think these goals were sufficient to put us in a position to do that.

We have also to make those goals a reality, we've been doing a tremendous amount of communication, coaching and discussion across our entire organization. A number of our senior officers have been visiting and I've talked with most of the lenders throughout our organization personally and others have talked on my behalf with the rest of them.

We've really talked about how conservative some of our guys have become and that conservatism is a great thing but you can take it too far and that we've got to be a little more open minded and not just stay in the foxholes. We've got to get out and take advantage of great business opportunities that do exist out there in this environment.

We've also talked about the fact that we've got such a robust net interest margin, if I need to be 25 or 50 or 100 basis points more aggressive on a high quality piece of business to get it, that we should do that. We can afford to take that additional reduction in price short-term to get some really high quality business knowing that we can get to more normalized pricing in future years on that.

So, we have done a lot of things to make this a reality. Our Board of Directors also has been very involved in this planning process and in May we had a special Board meeting and re-shuffled some fairly significant parts of our organizational chart and promoted 2 of our former senior officers into C level positions, Tyler Vance is now Chief Banking Officer; Darrel Russell is Chief Credit Officer.

Darrel has been with us 30 something years and has co-chaired the loan committee with me up until May and at that point, he took over the Chairmanship of the loan committee. Tyler Vance has been the principal architect of the significant improvement in our deposit base over the last couple of years and as it moved from the position of Head of Retail banking to Chief Banking Officer.

And with those promotions, those guys were really charged with getting certain portions of our Company in a much more offensive minded stance, so we have done a lot of coaching, we have done a lot of communicating with lenders, we have done a lot of assessment in this, we've reorganized our org-chart, and done the things that I think we need to do to get a little more offensive minded.

When you make these FDIC acquisitions, you acquire so many challenging assets to deal with that it tends to take your native conservatism as a Company and make you even more conservative because all of a sudden you're dealing with a lot of somebody else's problems that are in a lot of cases more severe than things we would normally deal with.

And the way we were structured before, so many of our guys were working on the acquired portfolios and working on legacy portfolios and that just, hyper-conservative I don't like anything, sort of sentiment was beginning to permeate some of the legacy parts of our Company.

And we saw that happening and realized that was retarding our growth opportunities or our ability to take advantage of those opportunities, so we really created a little more division and separation between those parts of the Companies with the goal of getting positive growth going in that loan portfolio. And I think we've done what we need to do to make that happen.

Okay, that's some great color, George. I want to be clear about the monthly goals. Is that a total loan growth goal which would be inclusive of the covered loan run-off or is that just organic loans which would exclude that?

That is organic growth in non-covered loans. The covered loans will be running down as well but what we hope to see is that covered loans will increase through further acquisitions. Every month we don't make an acquisition, covered loans rundown and then we hopefully make acquisitions and that number ratchets up considerably to a higher level and then runs down.

So, we sort of built in our model the assumptions that covered loans keep ratcheting up in '11 and '12 through periodic acquisitions and even into '13 and that by '13, somewhere in '13 and '14, we've got to have a growth rate in our legacy portfolios that is more than sufficient on a yield basis to offset the run-off in the covered loan portfolios and that's what we're modeling and working on.

1 of the strengths of our Company I think has always been our modeling and planning ahead and looking at lots of scenarios, months and quarters and years into the future and doing the things well in advance that you have to do to be in a position to be successful in the future, and we certainly spent a lot of time doing that in March, April and May of this year and I think we will see the results of that in the coming quarters, and certainly in the coming years.

And 1 of the legitimate questions you could ask about our franchise is well gosh, they're doing a great job generating lots of profit from these acquired institutions but what are they going to do after that, and we've got a plan for that and I think it's a very good plan.

Okay, sounds great. Thanks, George.

Kevin Reynolds, Wunderlich Securities.

Good quarter and I'm pleased to hear you talking about the out-periods out there and the plans for after what we've already done kind of moves into the rear view mirror. If you could, I've noticed that, and I think this is no surprise, the efficiency ratios moved higher after you make acquisitions because of the initial carry of the expenses, and it's well above what you were comfortable running at before you embarked on the FDIC-assisted acquisition strategy.

Over time, where do you think the efficiency ratio can go? It seems to be in the mid-to-upper 50%s right now. How low do you think you could take it before you start to impact the service levels of your franchise and would reductions in the efficiency ratio be more cost save related or would they be more revenue related in your mind or would it be a balance between the 2?

Well, certainly, we are adding a lot of cost with our acquired institutions and these covered loan portfolios to manage them properly and manage loss share properly and so forth, I mean you have to spend a lot of money and it takes a lot of resources. As those assets resolve, over time, and those portfolios run-off, they will be the ability to rationalize a tremendous amount of that cost structure and there's certainly lots of conversion cost and lots of training cost as I alluded to, we're spending just a lot of money training and integrating these new offices in a cultural aspect and I'll give you an example of that.

Our Board of Directors had a 3-day Board meeting in Georgia in June and we flew all of our Directors and supporting staff over there. We had breakfast with 1 group of officers, 1 day toured offices, looked at properties, had lunch with a different group of officers and an expert on banking in Georgia, toured facilities and looked at properties that afternoon, had a cocktail reception and dinner with a third group of officers that night and then repeated the whole thing in different markets the next day.

And those sort of exercises are not inexpensive but they were incredibly effective in helping our Directors understand what we've got in Georgia much more intimately and in motivating our staff and over there and making them realize what an important part of our team they are. Friday night, I'm flying to Mobile, Alabama. I'll spend all day Saturday in Mobile touring branches and so forth.

I'll fly to Bradenton, Florida and do the same thing in our Florida offices there all day Sunday. And we've got people, those are just examples, we've got people literally going office to office on a regular basis every day all over the franchise, getting to know our staff there better, letting them get to know us better, constantly creating teaching opportunities and just pulling this whole infrastructure together.

So, we're spending a lot of money for that. Where do I want our efficiency ratio to be and where do I think our efficiency ratio will be 4 years, 5 years from now when we have completed the conversions and integration of the last FDIC acquisitions? I would expect to see our efficiency ratio in the low 40%s to high 30%s.

And with all that just 1 other question. Do you ever take any time off?

(laughter) I did an interview with a gal here the other day and she asked that same question. I said, there will be plenty of time to take time off when this window of opportunity closes and right now, we're in an exceptional window of opportunity and I and large numbers of our staff are working very long hours to take full advantage of that window of opportunity.

We'll keep doing so as long as the window is open. And what we want to do is take full advantage of this unique opportunity and maintain extremely tight control and oversight on what we're doing while we're doing this. It is a very important time for the future of our Company.

Right. I agree. Thanks. Good quarter.

Michael Rose, Raymond James.

Just wanted to follow-up on Matt's question about the loan growth guidance. I know last quarter you'd said that you expected legacy balances to be up this quarter but they retraced just a little bit. But going forward, geographically, where do you think that growth is going to come from and then also by product-line and does that include hiring any additional lenders? Thanks.

Well, Texas will be the best market of opportunity for us by far. The Arkansas economy is 1/12 the size of the Texas economy on a GDP basis so it doesn't afford just the sheer magnitude of opportunities that you have in Texas. The Georgia economy is a third the size of the Texas economy on a GDP basis, but it's pretty well battered and beaten up so there's not going to be a great amount of opportunity there and the franchise we have in the other southeastern markets, with the exception of North Carolina, is fairly small.

We've got a pretty good presence in North Carolina, so I would say where we see it coming clearly Texas is number 1, Arkansas is number 2 and North Carolina is number 3 as our markets to achieve that loan growth. But Texas is number 1 in a big way.

As far as what type of product, I think you will see that coming in. It will be real estate lending, primarily construction and development lending and secondarily CRE lending, which is what our balance sheet has been and consistently been and where I think we actually do by far our best work.

So, I think we'll see those being the main areas of opportunity, and as I said in my prepared remarks, the key is to achieve that level of growth and maintain adherence to the very strong credit disciplines that we've followed for many many years that have helped us weather the recent storms so effectively and we are very confident we can do that.

The final question you ask is are we adding more lenders? Yes, we are and we will be opening an additional Texas office in the first quarter of next year in Austin. A very strong young lender who has been working out of our real estate specialties group office for a number of years now will be pioneering that office expansion in Texas. We think that Austin office is 1 piece of the steps that we will take to achieve the growth that we want to achieve.

Okay. 2 follow-ups if I may on those points. Can you talk about loan growth trends in Texas in the quarter, were they up on a legacy basis? And then secondarily, assuming no more acquisitions, when do you think you'll have net positive loan growth with both legacy and the covered portfolio assuming again no more FDIC-assisted acquisitions? Thanks.

Well, I wouldn't assume no more FDIC acquisitions. I think that would be a bad assumption. We've bid on transactions since our 2 most recent acquisitions. We've got I think 7 opportunities that we're doing due diligence on, or are in various stages of looking at now, so I think there will be more FDIC acquisitions.

As I've said in my prepared remarks, I think covered loans will be our number 1 growth source this year and even with positive growth in non-covered loans this year, the remainder of this year and next year, I still think covered loans will be our largest growth source in 2012. It's unclear to me whether there are enough acquisition opportunities still in 2013 to suggest that covered loans would be the largest growth source that year, probably not.

So what I would see is covered loans being the preeminent growth category in '11, the remainder of '11 and '12 being a secondary growth category in '13 and accelerating growth rate of non-covered loans getting some positive momentum in the second half of this year, getting $240 million minimum growth next year, $360 million minimum growth in 2013.

And 2013 most likely is the hand-off here where the non-covered loans actually become the preeminent growth engine for assets, and then I think that picks up further in 2014 and probably you're out of the covered loan business as far as growing that portfolio by 2014. That's sort of the way we're looking at it.

Okay, thanks, guys.

Thank you. And I know Michael is already off but let me comment. Texas at June 30, our Texas offices accounted for 38.7% of our non-covered loans, that was up 0.5% from 38.2% at the March 31 quarter end date, so Texas as I indicated is the driver right now. Next question?

Andrew Boord, Fenimore Asset Management.

It's a great quarter in every metric that I could find with the 1 exception I'll ask about that which I feel kind of guilty for asking about with such a good quarter. But the 30-plus day past due is up a little bit even backing out those 2 loans you mentioned. Is that something you all are, worrying is probably the wrong word but something you're thinking about?

Andrew, that further increase really related to 1 loan that hit 30 days past due at the last day of the quarter and that loan is the subject of intense negotiations regarding a renewal on it. 1 of the interesting things about the economy in which we're operating now compared to 3 or 4 or 5 years ago is on projects where folks have lost a lot of their equity investment or maybe lost all of their equity investment, and that's not the case here, in this 1 loan I'm talking about but, where they've lost it all, but negotiations are just different than they used to be.

I used to sort of view our business as a figure skater who is every step and every action is planned out and choreographed, and you achieve results consistent with just a perfectly choreographed implemented pre-planned program. That's kind of the way I viewed quarters in our Business and our Business now with the economy the way it is and the regulations the way it is and with all of these FDIC acquisitions, it's more like a hockey match.

There are unexpected things that happen and it's just a more dynamic environment. Of course, a gold medal in hockey is maybe even better than a gold medal in figure skating. If we keep putting up gold medal results that's a good thing. But, 1 of the things that has made our world more like a hockey match than a figure skating routine is the fact that negotiations are just tougher.

For example, these 2 loans that were on non-accrual over the end of the last quarter that are now fully current, those guys had lost a large part of their equity in these transactions and they wanted us to take a hair cut on these loans as part of renewing them, We refused to do that, and finally when it became clear that negotiations weren't going to get us to where we needed to be, we teed them up for foreclosure.

When they realized we were serious that we weren't going to take a hair cut like a lot of other banks would do, then they came forward and paid the interest and made a principal reduction and put up a reserve for the next years taxes and interest and renewed the loan and went on down the road. They don't want to lose the opportunity to recover their equity, but they had taken a beating on their equity.

The property didn't appraise for as much as it did several years ago so they wanted us to take a beating too, and I'm old school. Debt's debt. You have to pay debt. Equity is equity and equity is at risk first and you only lose debt if all of the equity is gone and you take it over.

So, we're in that same situation on this loan that went 30 days at the end of the quarter. The customer has lost a lot of his equity, not all of it. There still appears to be good equity in the loan but he is fighting us tooth and toe nail in negotiations and we're in negotiations. My guess is we would get some sort of resolution on that deal negotiated but it's just the environment in which we operate today.

It's different than it was 3 years or 5 years ago and the thing I like best about our Company is we're probably -- our best skill set is probably played to the current environment in which we're operating today.

So, am I concerned about that credit and that increase in the past due ratio? Not particularly, because I don't think there's any loss content in the credit. But, I would say it's reflective of the fact that it's just you've got to have a better skill set to do this business today than was required to do this business 3 years or 5 years ago.

Well thanks for the information and thanks for fighting for us on those loans. Appreciate it.

David Bishop, Stifel Nicolaus.

A question for you in terms of the covered loan portfolio. I know you sort of -- obviously it's broad guidance and we're sort of operating in an unknown environment in terms of the duration of those assets. But, I don't know if there's any percentage in the back of the mind in terms of is there an opportunity to refinance those and capture them on the balance sheet? Is that sort of implicit in that 4 to 5 years duration or as you sort of look at that portfolio, is most of that a depleting asset?

Well, certainly, we don't want to refinance any of those loans during loss share because as the loans set right now, we've got an FDIC guarantee effectively on 80% of all of those loans. And if I refinance them and loan them more money or restructure the deal in a way that constituted a refinance, then I would take that asset out of loss share and have it on my books and have to reserve for it and everything else.

So, we do not want to take assets out of loss share just simply because of the additional credit enhancement protection that that affords us. What we are trying to do is to work these assets, reduce them, improve them, if they don't already meet our standards so that at the end of loss share, and loss share runs out in 5 years on the commercial assets and in 10 years on the residential assets, we want to make sure that the assets by the end of loss share are assets that we're happy having on our books without loss share.

So, in a lot of these cases where an asset has been amortized over too long a period of time, we're working with the customer to shorten the amortization or if collateral is diminished in value and the loan is no longer adequately collateralized we're working with the customer to modify the loan to pick up additional collateral or reduce principal or do whatever it takes to get the loan properly margined.

So, what we're trying to do is take these portfolios, many of which the loans do not conform to our standards and work them into loans that do conform to our standards so that we'll be comfortable keeping them on the books in a post-loss share environment.

And my guess is that the balances that will remain from these acquired offices and either remain being remain in the sense of their loans that we acquired that the balances are still outstanding or new loans that get originated in place of loans that get paid off that probably about 50% of those portfolios really become those customers, 50% of those balances become permanent parts of our balance sheet and the other 50% gets liquidated 1 way or the other.

Thus far, in terms of underwriting authority within the FDIC acquired branch as a system, has there been any sort of passing the baton where they have independent underwriting authority on the ground there?

We have given a handful of lenders at our acquired institutions, particularly the first acquired institution, some individual loan authority. And the first acquisition, that has been on the books really 17 months now, 16 months now and those guys have really embraced our credit culture and they really know what we're striving to achieve and understand it and seem to fully bought into what we're trying to do.

So, those lenders have been given some individual authority. We're on the cusp of granting some additional grants of authority to some of these guys that have been in the queue long enough that they really understand what we're doing and we're confident that they've got it and they've embraced our culture.

2 other things that we've done in the last oh, really 30 days to begin to start getting some growth out of the opportunities that exist in some of these acquired markets is John Davis, who has been running our original acquisition offices from Hot Springs, Arkansas has moved to Cartersville, Georgia. He just made the move this last weekend, he and his wife have relocated over there. And Barry Brown who has been working with our Bradenton and Palmetto, Florida offices out of Dallas, Texas has relocated in the last month to Bradenton, Florida.

So, we've put 2 of our senior guys that we've got a lot of confidence on on the ground, and what we really are trying to do with those is, I've realized that the guys who run these acquired offices tend to play wonderful defense from long distance but I need them to also begin to play offense in those markets.

And I realized that the only way I was going to get them to do that was to get them to live there and to go to church with the people that are our customers and go to the country club with people that are our customers and hang out in the local businesses and restaurants and so forth that are our customers, and if they get over there and really get ingrained in the community they will become more open to capitalizing on the offensive opportunities in those markets.

So, that is a sort of an evolution in our Management of these offices that we've just implemented this quarter that I think will help us begin to start to capitalize on some new business opportunities more than we have been in those acquired markets.

Great. Thanks for the color, George.

Derek Hewett, KBW.

Regarding your last comments in terms of organic growth opportunities in your new footprint, could you provide any color in terms of the numbers that you've currently been able to achieve?

Really, the growth that we've had in Georgia, South Carolina, Alabama, and Florida, the 4 markets where we didn't have offices only accounts the organic stuff that's been originated since we have been there, only accounts for 0.44% of our non-covered loans, so it has been very minimal.

Now, with that said, subsequent to the end of the quarter, we closed our first significant Georgia transaction. That's an excellent low leverage deal on a facility that is leased to a national credit tenant, long term lease, excellent deal and that's about I think it's about a $6 million piece of business.

And that again occurred after the end of the quarter and is our most significant new origination in 1 of the new states other than North Carolina where we've had an 11 year presence. So, I think we are beginning to get some positive momentum in those markets.

I think moving these guys over there will help that. But quite frankly, the first thing you've got to do with all these acquired offices is you've got to get your arms around all their challenges and problems and get all of the work out plans in place on all of that before you can really start going forward and capitalizing on positive opportunities. But, we are generating new business in those markets now. It's just very slow.

Okay, great. And then some housekeeping items. Do you have the outstanding balance of your uncovered watch list and classified commercial loans? I think the watch list totaled around $62 million last quarter and the classified loans were about $48 million?

Derek, I'll have that sort of information in here next conference call since you asked about it.

Okay.

But Craig is making a note to make sure we have it next time but I don't have that at my finger tips now and it will be in our queue that will be out in a few weeks.

Okay. I guess in terms of movements, did any material movements either way in those balances, it's been relatively flat it seems like for the past at least 2 quarters.

I'm not -- off the top of my head, I'm not aware of anything that's going to move that number a whole lot 1 way or the other.

Okay, great. And then could you talk a little bit about that large OREO property in Dallas and could you remind me what the original unpaid principal balance was and kind of where you guys are currently carrying that?

Well, let me give you an update on it. We had it under contract. We obviously didn't get it sold. You would have noticed that change in our balances had we gotten it sold.

Our buyer asked for an extension of the contract and our view was that our buyer was treating his contract more as an option than as a purchase obligation and without him putting up hard earnest money and showing a firm commitment, we declined to extend that. So, we are negotiating, we have 2 other interested parties with whom we are negotiating.

At this time, I'm not totally up to speed on the status of those. I know ongoing discussions were going as of a few days ago with 1 of those buyers and the other party has expressed an interest. So, we'll sell that when we get it sold and I'm not terribly concerned about it.

I'm comfortable with the valuation we've got on it. We talked about the fact in previous calls that we are carrying it at a value substantially less than our most recent appraisals on the property, so we think we've got the room to sell it at a significant discount to appraised value and still come out on the property, so that's where we are.

Okay, great. Thank you very much.

Andy Stapp, from B Riley & Company.

Hello again. What discount did you use in marking your Q2 deals?

As far as--

Marking them to market doing your MPV computation.

On the loans the acquired loans in the acquisitions, we use discount rates that range from 6% to 9.5% for the net-present value marks and a loan secured by AAA collateral, fully secured by AAA collateral got discounted at 6% and then there were 6.5% and 7% and various insundry increments of discount all the way up to 9.5%.

The most severe quality issued credits got discounted at 9.5%. The OREO got discounted at 9.5%. The FDIC receivable and the FDIC claw-back payable got discounted at a 5% rate, same as we've done on pretty much almost all of the deals. I think we had a little bit different discount structure on the first deal but this is pretty typical for how they've been done.

Okay, and can you give us some color for the outlook on the margin, a lot of it was due to covered loans and should we expect an increase in the Q3 margin due to a full quarter effect of your Q2 deals?

I said in the last conference call when our margin in Q1 was 4.61% that I was very reluctant to give positive guidance on our margin when you're sitting at 4.61% or 5.61%, excuse me, 5.61%. That it's hard to feel comfortable saying gosh, we could do more, but our margin in Q2 grew 19 basis points and you're exactly correct.

That's a result of a fairly significant reduction in our cost-to-funds and the fact that we added a lot of covered loans and the covered loans were the highest yielding parts of our balance sheet. So, that combination kicked us to the $=5.80% level and the 5.80% level looks like a fairly reasonable place for us to think we're going to be for a few quarters.

You are correct in your assumption that having 3 months of the most recent covered loans versus 2 months will tend to push the margin up a little. There's also scenarios if we continue to sell off the taxable securities that we acquired, well that might put an actual negative damper on net interest to income.

It actually will improve the margin since those taxable securities have low yields, and we think there's room for further improvement in our cost-of-funds, so those things tend to push up the margin. The things that would tend to push the margin down if we don't make more acquisitions and the covered loans run-off as a slight percent of our total assets, that would tend to blend the margin down a little bit.

And if we get a little more aggressive and get more growth on our legacy loan portfolio, that could tend to dilute the margin down a little bit. But, basically I think that 5.80% range plus or minus a little bit is probably a pretty reasonable place to think that we're going to be for a couple of quarters.

Okay, and I know you provided total delinquencies but do you have just the early stage component?

I do not have that at my finger tips either. Obviously, the increase was pretty much all related to the 1 loan that was 30 days on the last day of the quarter.

Okay. All right, thank you.

Brian Martin, FIG Partners.

My 1 question on the margin was just answered but just as far as thinking about 2012 and just some of your comments about getting back to organic growth, is that more likely a headwind I guess to the margin in 2012 absent kind of FDIC deals? Is that the way we should be thinking about it?

Well, where the margin will go in 2012, 2013 and 2014 is going to depend largely on the mix of growth between covered loans and legacy loans. Obviously, our average yield on covered loans is 8.80% in the last quarter and the non-covered loans were Greg, 6 -- what was the number?

Low 6.20% I think.

Yes, 6.20%. I don't have that number right in front of me at the moment but around 6.20%. So if we originate, if we added a lot of non-covered loan growth that's going to tend to blend the margin down a little bit; if we add a lot more covered loans then that's going to tend to support the margin or even blend it up to a higher number.

So, I've given guidance already and discussed my thoughts about our ability to grow covered loans through additional acquisitions and non-covered, so you can sort of plug that in your model and put in the numbers you want for growth, what you think it's going to be and that will sort of tell you where you think our margin is, I believe.

But, we're pretty positive on the margin story and will we have a 5.80% margin 5 years from now? Probably not. That would be really exceptional if we did, but do we have a margin that's in the 5% range plus or minus? I think with the work that we've done on our deposit base, that's not an implausible scenario to think that even longer term we could have margin, high 4%s to low 5%s.

Okay, thanks and George, you're with the acquisitions when you look at your deposit mix, do you have a target as far as your non-interest bearing deposits where you think you can get those? And just kind of what are your expectations there as you kind of look at the mix and maybe as rates start to change? I think there's somewhere around 12% or 13% right now.

At the end of the quarter our non-interest bearing deposits were 13.2% of deposits and that of course is up 4% to 5% or 400 to 500 basis points from where we were a couple of years ago.

Right.

And our CD deposits at the end of the last quarter were under 35% and I think your question about deposits probably raises the subject that I should have talked about more in the call because it is just so fundamentally important. Our cost-of-funds, our costs have been dropping. We think there's more room to drop those. We think that is just because of the fundamental improvement in the quality of our deposit base over the last 3 years, that it's just basically flipped the numbers from 2/3 CDs in the old days to 1/3 CDs today in real round numbers and that non-interest bearing piece is getting bigger, has gotten bigger.

I think we continue to focus on core deposits. That's been 1 of the themes that we've been preaching and teaching about every month, every week for the last several years throughout the Company is improving that deposit base and being less focused on CDs and more focused on core accounts.

And I just think our guys have really embraced the message and are getting it and are doing it and that's 1 reason that I'm so optimistic about where our margin can be 3, 4, 5 years from now even when the covered loans are greatly diminished as a percent of our balance sheet maybe 5 years from now, I still think we've got very good margins by historical standards.

Okay. And as far as that, what do you think that number can get to as far as your non-interest bearing is just higher than it is now, but no target in mind at this point?

We don't have a specific target but the focus is to improve it, to grow it.

I've got you. Okay. Thanks very much, George. Nice quarter.

Dan Oxman, Jacobs Asset Management.

Congrats on a great quarter. My question is on the provision, you gave guidance on foreclosure expenses declining going forward. Do you have the same view on the provision?

Well, I've given the guidance on our provision expense. We think it's going to average less than it did on a quarterly basis last year. I think that's going to be true for our charge-offs and net charge-off ratio, so we generally see that coming down.

Looking at FDIC acquisitions, is there like a minimum asset size you're looking to bid on whether individual or on a linked basis?

Not really. Certainly we call out transactions that are overly small and unless there's specific considerations. For example, if in 1 of the communities where we've already acquired or had facilities, a very small deal came up that was a nice little small compliment to what we have, we might look at that at $50 million or $75 million or whereas otherwise we might say gosh, we're not going to look at anything less than $125 million or $150 million.

So certainly, there's a fixed cost and commitment of resources to doing any 1 of these transactions and you don't want to get bogged down doing a bunch of baby deals that don't move the needle on your numbers unless they happen to be a real good strategic fit with your franchise from a resource location point of view and we would look at a small deal that would fit that profile.

Great, thank you.

Peyton Green, Sterne Agee.

Yes, George, congratulations on a great quarter, but a question in terms you mentioned that your lenders or bankers had been maybe too conservative in their approach. And I was just curious, maybe if you're doing anything differently on the incentive side or is this just simply reminding them that the end of the world is not necessarily upon us, how do you get that mentality changed and then do you feel like you would be much ahead of the competition across your markets? Thanks.

We're not doing anything additional on an incentive basis to motivate our lenders to go out and grow loans and years ago, we tinkered around with different models that incented lenders for growth and tried to temper those incentives for various qualitative metrics and so forth. And we messed with that for years and honestly, every model we came up with, I felt was dynamite waiting to blow up on us.

So, we after experimenting with that for a number of years, gosh probably a decade ago, we threw away all those models and said, we're going to pay our lenders a fair rate of pay and we're going to hire guys who are winners and who want to win and be successful and pursue excellence every day. We're going to let those guys just allow their natural competitive juices and desires to exceed and excel and perform at a high level drive the growth of our portfolio.

And basically, what we've been saying to the lenders the last few quarters is guys, we know you've seen some really ugly things over the last 3 years but the world has changed around us and has been really hard hit by this economy. But, there's good business out there and we've got to be more aggressive in going out there and finding the really primo pieces of business in this market.

So, that really is just communication to them of regarding our goals and explaining to them what the model of our balance sheet looks like this year, next year, the next year and the next year, and how important it is that we capitalize on the growth opportunities to achieve our long term goals in 2013 and 2014 and that they seem to have gotten the message and understand the importance of finding high quality business opportunities out there.

Okay, and then I guess in the FDIC-assisted markets that you've entered, as you travel around those markets do you feel like the opportunity is greater today than maybe a year ago when you first entered North Georgia for example, and do you feel like there's been any positive competitive response, or is it still wide open?

As far as opportunities for new growth?

Yes.

Yes, I think that things are getting better in those markets. But there's still a lot of challenges and a lot of problems to be dealt within those markets and there's such a weight of challenge and problem on those markets that there are limited new growth opportunities. There are certainly some and again, we want to get out there and be positive about those new growth opportunities and take advantage of those opportunities, but the opportunities and specifically Georgia, Florida, South Carolina and Alabama are going to be subdued for quite some time.

Okay, thank you.

David Bishop, Stifel Nicolaus.

1 follow-up in terms of you enumerated in terms of where the source of the growth can come from in terms of construction development. Shuffle that around a little bit. Any sense how much in terms of the dollar volume of the construction loans are coming up for renewal I guess in the next year how that compares to maybe the past 12 months and maybe what the updated loan-to-value is on that portfolio?

I don't have a specific number. Most of our construction loans are done on terms ranging from 9 months to 36 months, so I would say that somewhere around half of that is at any point in time plus or minus a little bit around half of that is going to material within any given year and be subject to renewal.

We gave in our last and we always give in our press releases or our 10-Qs and our annual report under the table on construction and development loans, we give a percentage of loan-to-cost and loan-to-value on that portfolio and at March 31, I'm looking for it. At March 31 our weighted average loan-to-cost in that portfolio was 63% and our weighted average loan-to-appraisal was 56% and those loan-to-appraisal numbers were based off most recent appraisals.

So, we don't reappraise every property every quarter or even every year. But typically, if we have a reason to think that the properties have diminished in value we obtained new appraisals in connections with renewals or if there are other significant events. If the customer is teetering on the brink of default or something or if there is a renewal, some significant events taking place with that loan we get an appraisal.

So, at March 31, the average loan-to-appraisal was 56% on that portfolio, and you and I have talked a number of times as all of our folks on the call have heard me say, 1 of the things that has been so important in the performance of our portfolio is the fact that we get so much cash equity in our transactions typically, in most of our transactions.

And we've had so much equity in our deals that even when properties have depreciated a lot, customers have stuck in there and saved their property because they had so much invested in it, or so much equity in it that they couldn't afford to let it go. So, that is an important consideration and we'll continue to be an important consideration in our portfolio going forward. We've become more convinced than ever that lots of cash equity is a very helpful element of a properly structured loan.

Thanks, George.

Do we have anymore questions, operator?

Derek Hewett, KBW.

Good afternoon again. I have 1 quick follow-up question. What is the duration of the bond portfolio and has it changed materially since the last quarter?

Derek, I apologize. I've got a lot of information in here on the bond book but I don't have that.

Okay.

I think we were at about somewhere between 6 and 7 years duration at the last call. I believe that number, I could be wrong but I think that's the right number and of course, these Ginnie Maes that were essentially all of the growth was these Ginnie Maes. They probably have about a 2 or 3 year duration on them, so whatever the duration was at the last call, that duration has been blended down as of June 30 by the addition of those Ginnie Maes.

Okay, great. Thank you very much.

At this time, there are no further questions. Do you have any closing remarks?

There being no further questions, that concludes our call. Thank you for joining us today.

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