Susan Blair - Executive Vice President, Investor Relations Greg McKinney - Chief Financial Officer Tyler Vance - Chief Operating Officer George Gleason - Chief Executive Officer.

Mike Rose - Raymond James Jennifer Demba - SunTrust Robinson Aaron Arnold-Wolf - KBW Kevin Reynolds - Wunderlich Securities Dave Bishop - Drexel Hamilton Matthew Olney - Stephens, Inc. Blair Brantley - BB&T Capital Markets Brian Martin - FIG Partners.

Welcome to the Bank of the Ozarks Incorporated First Quarter Earnings Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, that this conference is being recorded.

Now I will turn the call over to Susan Blair. You may begin..

Thank you. Good morning. 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 quarter just ended and our outlook for upcoming quarters.

Our goal is to make this call as useful as possible to you in understanding our recent operating results and outlook for the future. A transcript of today’s call, including our prepared remarks and Q&A will be posted on bankozarks.com under the Investor Relations tab.

During today's call and another disclosures and presentations, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic, real estate market, competitive, credit market and interest rate conditions, revenue growth, net income and earnings per share, net interest margin, net interest income, non-interest income including service charge income, mortgage lending income, trust income, bank-owned life insurance income, other income from purchased loans and gains on sales of foreclosed in other assets, non-interest expense, our efficiency ratio, asset quality and our various asset quality ratios, our expectations for net charge-offs and our net charge-off ratios, our allowance for loan and lease losses; loans, lease, and deposit growth, including growth in our non-purchased loan and lease portfolio; growth from unfunded closed loans; and growth in earning assets, changes in expected cash flows of our purchased loan portfolio; changes in the value and volume of our securities portfolio; the impact of prepaying Federal Home Loan Bank advances, the impact from termination of the loss share agreements in last year’s fourth quarter, conversion of our core banking software and expected cost savings in connections with such conversions, the opening, relocating and closing of banking offices; our expectations regarding recent mergers and acquisitions and our goals for additional mergers and acquisitions in the future; the availability of capital, changes in growth in our staff, the eventual impact of the Durbin Amendment and expenses with regard to regulatory compliance.

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

For a list of certain risks associated with our business, you should refer to the Forward-Looking Information section of our periodic public reports, the Forward-Looking Statements Caption of our most recent earnings release, and the description of certain Risk Factors contained in our most recent annual report on Form 10-K all as filed with the SEC.

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

The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings press release.

Our first presenter today is Chief Financial Officer, Greg McKinney, followed by Chief Operating Officer, Tyler Vance; and finally, Chief Executive Officer, George Gleason..

Thank you for joining today’s call. The first quarter is typically our most challenging quarter due to numerous seasonal factors.

As we discuss our first quarter results today, you may see the impact of some these factors, including the one or two fewer days than other quarters, the lower post-holiday transaction volume resulted in lower service charge income, the disruptions in business activity due to winter weather and the cost of our annual premium increases for health insurance and a majority of our salary increases taking effect in the first quarter.

Highlights of our first quarter included net income of $39.9 million, diluted earnings per common share of $0.47, closing of our acquisition of Intervest Bancshares Corporations with operations in New York and Florida, completion of the conversion of our acquired FNB Shelby core systems to Fiserv Premier and excellent growth in our funded balance non-purchased loans and leases, our unfunded balance of closed loans and our number of core deposit accounts.

In addition, our results for the quarter just ended included $2.3 million of tax exempt income from bank-owned life insurance death benefits, $2.5 million in net gain from sales and investment securities, $2.3 million in prepayment penalties from prepaying Federal Home Loan Bank or FHLB advances, approximately $1.3 million of acquisition related and systems conversion expenses, and approximately $0.7 million of software and contract termination charges, net of applicable income taxes, these items collectively added approximately 1 penny to our diluted earnings per common shares in the quarter just ended.

Net interest income is traditionally our largest source of revenue and is a function of both the volume of average earnings assets and net interest margin.

We continued to enjoy a very positive trend in net interest income in the quarter just ended as a result of good growth in average earning assets, which more than offset a small reduction in our net interest margin. Of course, loans and leases comprised a majority of our earnings assets.

In the quarter just ended, our non-purchased loans and leases grew a healthy $331 million. That’s more than double the $146 million of growth in non-purchased loans and leases in the first quarter of 2014. The first quarter is typically our lowest quarter of loan and lease growth.

In fact, in the first quarter last year, our growth in non-purchased loans and leases was only 11% of our growth for all of 2014, and similarly in 2013, the first quarter accounted for only 8% of that year’s growth in non-purchased loans and leases.

Our unfunded balance of closed loans increased $445 million during the quarter just ended and totaled $3.41 billion at March 31, 2015. While some portion of this unfunded balance will not ultimately be advanced, we expect that the vast majority will be advanced. This has favorable implications for future growth in loans and leases.

In our January conference call, we said that one of our goals in 2015 is to achieve growth in non-purchase loans and leases exceeding our 2014 growth of $1.35 billion. With our first quarter 2015, non-purchase loan and lease growth more than doubling our first quarter 2014 growth in non-purchase loans and leases.

And considering our $3.41 billion unfunded balance of loans already closed, we are off to a great start in achieving our goal for growth in non-purchase loans and leases in 2015. In regard to net interest margin, our first quarter net interest margin on a fully taxable equivalent basis was 5.42%.

That’s a 10-basis point decrease compared to our full year 2014 net interest margin of 5.52%.

In our January conference call, with certainly given the continued decrease as expected in our balances of loans purchased in 2014 and previous years, including the higher yield in loans previously covered under loss share and considering the current low rate ultra competitive environment in which we are operating, we expected another year of declining net interest margin in 2015.

We said that excluding the effects of any future acquisitions beyond the Intervest acquisition, we expected a decrease in our net interest margin in 2015, somewhat similar to the 28 basis point decrease in net interest margin we experienced in 2013, compared to 2012. Our first quarter results are consistent with that guidance.

As part of our guidance in the January conference call, we also said that we expected that our cost of interest-bearing deposits would increase between 1 and 5 basis points in each quarter of 2015 as a result by deposit gathering activities to fund loan and lease growth.

During the quarter just ended, our cost of interest bearing deposits was 29 basis points, an increase of 2 basis points from 27 basis points in the fourth quarter of 2014. That result is also consistent with our guidance.

Let me remind you that our guidance for net interest margin including the guidance on cost of interest rate deposits excludes the effect of any future acquisitions.

With our first quarter net interest margin well within our guidance and considering our good first quarter growth and the funded balance non-purchase loans and leases and the unfunded balance of closed loans, we appear to be very well positioned and maintain a very positive trend in net interest income in the coming quarters.

And more importantly, we are very pleased with the credit and interest rate risk profile at the loans and leases we have booked.

In the quarter just ended, we obtained large amounts of cash equity of most new loans continue to require appropriate risk adjusted pricing and actually increased our percentage of variable rate loans, which now comprised 73.15% of total non-purchase loans and leases.

We believe we are achieving our excellent growth in margins the proper way without taking excessive credit or interest rate risk. Now, let me turn the call over to Tyler Vance..

During 2014, we accelerated deposit growth as needed to fund our record 2014 loan and lease growth. We did that very efficiently ultimately utilizing 25 spin-off offices.

As we entered 2015, we already had a significant amount of excess cash on our balance sheet and we expected to receive approximately $300 million of excess cash from the Intervest acquisition and liquidation of the Intervest bond portfolio.

We also had available to us several hundred million dollars of potential additional low cost wholesale funding opportunities if needed. With all this cash and identified cash sources, we knew in early January that we would not need extra cash for several months. So we discontinued our spin-off campaign.

We had good success with our spin-off strategy in 2014 and we expect to re-introduce it in selected offices as and when needed to fund future loan and lease growth. In our January conference call, we mentioned how pleased we were with our record growth in 2014 in our number of net new core checking accounts.

If you recall, we added approximately 9,370 net new core checking accounts in 2014, excluding accounts acquired in acquisitions.

We are very pleased to report that even with our spin-off campaign on hold, our retail banking team successfully accelerated our net core checking account growth in the quarter just ended, adding approximately 3,412 net new core checking accounts, excluding the core accounts acquired in our Intervest acquisition. That is a quarterly record.

Our ability to achieve such strong core account growth is a tribute to our retail team and has favorable implications for future service charge income and liquidity. In our January conference call, we spoke at length about our decision in 2014 to convert our core operating systems to Fiserv Premier.

By then, we were well along in the conversion process, having successfully completed the first three systems convergence and we reported that we are expected to complete our fourth conversion of the FNB Shelby systems in February 2015. The FNB Shelby systems conversion occurred as planned, thanks to the excellent work of our operations team.

The Intervest systems conversion is our final pending core systems conversion and is scheduled for the first weekend of June. This conversion should be the easiest so far because Intervest is already running the Fiserv Premier system, albeit in a Fiserv service bureau environment.

Additionally in the January conference call, we reported that we are expected to open our new Little Rock Arkansas data center in the second quarter of 2015. That data center is now substantially complete and fully operational.

Our systems there are currently running in tandem with our primary data center, which has been located in Ozark, Arkansas for many years. We expect to switch our primary data center functions from Ozark to the Little Rock data center in a few weeks.

The Ozark data center will remain intact and will serve as our backup to the new Little Rock data center.

Our core systems conversion projects combined with our two fully redundant data centers, with near instantaneous backup capabilities position us well for the growth and enhanced services we have planned for both our internal and external system users in the years to come.

In addition to the favorable implications for service quality and new product introductions, these projects should also improve efficiency over time as we fully leverage the capacity within our new systems, data center and technology infrastructure.

Our efficiency ratio for the quarter just ended improved to 42.8%, compared to 44.1% for the fourth quarter of 2014 and 45.3% for the full year of 2014. Earlier in today’s call, Greg mentioned several significant items of income and expense affecting our results in the quarter just ended.

If all these items had been eliminated, our first quarter efficiency ratio would have been even better.

In our January conference call, we said that while our efficiency ratio will vary from quarter-to-quarter, especially in quarters where we have significant unusual items of income and non-interest expense, we expect to see a generally improving trend in our efficiency ratio in the coming years.

This is predicated on a number of factors, including our expectation that we will ultimately utilize a large amount of the current excess capacity of our extensive branch network.

Our expectation that our ongoing core software conversion project will reduce software cost by approximately $2.75 million per year starting this year, while providing greater functionality for our customers and employees and creating other opportunities for enhanced operational efficiency and our expectation of achieving additional cost savings from our recent acquisitions.

With all of our systems conversions other than Intervest now done, we should see more of these cost savings in future quarters. When we exceed $10 billion in total assets, either as a result of additional acquisitions, organic growth or a combination thereof, we will lose some interchange revenue as a result of the Durbin Amendment.

And we will incur increased regulatory compliance costs, both of which will create some headwinds in our efforts to improve our efficiency ratio. Our guidance regarding an improving efficiency ratio considers the impact of exceeding $10 billion in total assets, but does not consider the potential impact of any future acquisitions.

Now, let me turn the call over now to George Gleason..

As you know in the fourth quarter of last year, we entered into agreements with the FDIC, terminating our loss share agreements on all seven of the banks we acquired in FDIC-assisted transactions.

We have previously said that our combination of these loss share agreements should provide us greater flexibility in serving the needs of our customers, while also allowing us to redeploy the resources previously committed to administration of loss share.

In the January call we also discussed that all future recoveries, gains, charge-offs, losses and expenses related to the previously covered assets would subsequently be recognized entirely by us, since the FDIC would no longer be sharing in such items.

We noted that our future earnings would be positively impacted to the extent we recognized recoveries in excess of the carrying value of such assets and gains on any sales. And then our future earnings would be negatively impacted to the extent we recognized charge-offs, losses on any sales, and expenses related to such assets.

We stated our expectation that the termination of our loss share agreements would have a net positive effect on our future earnings. That expectation was based on our historical experience in which we had recognized combined recovery income and gains on sales, well in excess of our combined net charge-offs, losses on sales, and related expenses.

All this played out as expected in the quarter just ending. When we realized net increases in other income from purchased loans and gains on sales of other assets, both of which included substantial positive contributions from loans and foreclosed assets previously covered by loss share.

Specifically our other income from purchased loans was $8.9 million in the quarter just ended compared to an average of $3.7 million for quarter end 2014. And our gains on sales of other assets were $2.8 million in the quarter just ended compared to an average of $1.5 million per quarter in 2014.

The increases in these two line items more than offset the increases in provision expense for purchased loans and increases in non-interest expense related to loans and foreclosed assets previously covered by loss share.

Specifically our provision expense for purchased loan was $1.3 million in the quarter just ended compared to an average of $0.8 million per quarter in 2014. And our loan collection and repo expense and OREO write-down expense in the quarter just ended was $3.9 million compared to an average of $1.1 million per quarter in 2014.

These numbers suggest that as expected that placed in the quarter just ended, the termination of loss share resulted in addition income items which more than offset the additional expense items.

On another matter, during the quarter just ended we sold some of our longer-term municipal bonds resulting in net proceeds of $30.1 million and net gains of $2.5 million. This sale was driven in part by our concern that the sizeable paper gains on these bonds might diminish quickly if rates begin to increase.

Considering this led us to developing more comprehensive strategy, which included utilizing such proceeds to prepay $30 million of our highest rate callable FHLB advances resulting in prepayment penalties of $2.5 million.

The sources and uses of cash in these transactions almost exactly offset and the resulting gains on sale and prepayment penalties also almost exactly offset. Because of the favorable prices we received on the bonds we sold, our takeout yields to call on such products were less than the interest rates on the prepaid FHLB advances.

While these transactions were relatively small in the context of our entire balance sheet, we thank the transactions resulted in a number of small incremental benefits, including reducing interest rate risk, increasing secondary sources of liquidity, and more effectively allocating capital.

For those of you modeling our balance sheet and income statement going forward, this left us with $160 million of callable FHLB advances outstanding at March 31, 2015. These remaining advances have weighted average interest rate of approximately 3.56% and maturities ranging from September 2017 to January 2018.

Let me provide a few comments on asset liquidity. During the quarter just ended, we achieved noticeable reductions in our non-performing loans and leases and foreclosed assets, and we liquidated several performing loans that no longer met our credit standards.

As a result of all these, we feel that our asset liquidity at March 31, 2015 is about as good as it is ever been. The numbers support that assessment.

At March 31, 2015, excluding purchased loans, non-performing loans and leases as a percent of total loans and leases decreased to 33 basis point, non-performing assets as a percent of total assets decreased to 56 basis points, and our ratio of loans and leases past due 30 days or more including past due non-accrual loans and leases, the total loans and leases decreased to 57 basis points.

Our net charge-off ratio for non-purchased loans and leases was 37 basis points for the quarter just ended, that’s an annualized number and for purchased loans was 32 basis points. Our annualized net charge-off ratio for all loans and leases was 36 basis points for the quarter just ended.

During the first quarter of 2015, our net charge-offs increased to $5.1 million and included $3.8 million for non-purchased loans and leases and $1.3 million for purchased loans.

This increase in net charge-offs for non-purchased loans and leases was primarily due to our sale of $15.9 million of performing loans from our Corporate Loans Specialties Group resulting in net charge-offs of $2.4 million.

The net charge-offs on these loans accounted for 65% of our net charge-offs for non-purchased loans and leases in the quarter just ended. Corporate Loans Specialties Group is one of our newer teams and we’ve continued to develop and enhance our credit standards for this unit since its formation early last year.

During the quarter just ended we decided to sell all their loans not meeting our enhanced credit standards. The remaining loans in that portfolio all meet our enhanced credit standards, and we expect the future performance of that portfolio will be consistent with our overall company-wide credit results.

Additionally our net charge-offs for purchased loans increased in part due to our having previously terminated loss share agreements on our FDIC-assisted acquisitions which we discussed earlier.

In our January conference call, we said we expected 2015 net charge-offs for total loans and leases would not be significantly different from the range of net charge-off ratios we had experienced for total loans and leases in 2013, which was 26 basis point and 2014 which was 16 basis points.

Even with the higher net charge-off ratio in the quarter just ended, we still believe that guidance is appropriate for the reasons we’ve just discussed. Let me switch to a totally different subject.

Shortly after issuing our earnings press releases yesterday, we filed a shelf registration statement with the SEC registering an indeterminate amount of securities including common stock, preferred stock, warrants, depository shares, stock purchase contracts, stock purchase units, and debt securities.

We believe this shelf registration statement is a proactive move to support our future growth objectives as the filing will provide us increased flexibility and more efficient access to capital markets if needed in the future.

Historically, our robust earnings has generated sufficient retained earnings to capitalize our growth and we are currently well capitalized as that term is defined by all applicable regulatory capital standards, including the new standards under Basel III.

However, our first quarter growth in non-purchased loans and leases was 227% of our growth in non-purchased loans and leases in the first quarter of 2014 and the unfunded balance of closed loans now stands at $3.41 billion after growing significantly in the quarter just ended.

While we are not adjusting our prior guidance for growth in non-purchased loans and leases, we think it is prudent to anticipate scenarios in which our growth could be of such a magnitude as to necessitate additional capital. That concludes our prepared remarks. At this time we will ask our -- we will entertain questions.

Let me ask our operator to once again remind our listeners how to queue in for questions.

Operator?.

[Operator Instructions] Our first question is from Mike Rose from Raymond James..

Hey. Good morning, guys.

How are you?.

Hey. Doing fine, Mike. Good morning..

I just wanted to get a little context on the margin guidance, which I think you reiterated down about 28 basis points. I just wanted to be clear does that include Intervest and then also the pay down of FHLB advances in the quarter? And maybe any other future actions you may take with regard to remaining FHLB? Thanks..

Okay. Great. Yes. Our full year net interest margin in 2014 was 5.52% and the guidance that we’ve given on that is we expect that to be down roughly the same as our 28 basis points reduction in net interest margin from ‘12 to ’13, I guess.

Is that right, Greg?.

Yes..

And that does include Intervest, that does include the sale of bonds, that does include the FHLB prepaying. It does not include the effect of any future acquisitions since that impact on margin is unknowable..

Yeah. Okay..

In regard to future FHLB prepayments, you have noticed we’ve had that item in each of the last two quarters. We’ve had that because we had extraordinary income in the fourth quarter. It was the extraordinary income for termination of loss share in the quarter just ended.

The extraordinary income from the gains on sales of investment securities and we use those extraordinary income items to offset the cost of prepaying FHLB advances. We have no present plans to prepay additional FHLB advances.

If we have extraordinary or unusual income items and the accountants would probably prefer I’d say unusual instead of extraordinary since that has a defined meaning. We would consider using those unusual income items to offset prepayment penalties on additional FHLB advances, but we don’t have a commitment to do that.

We don’t have a present plan to do that..

Okay. That’s helpful.

And then as a follow-up, I wanted to dig into a little bit this quarter is non-purchased loan growth, which was much better than I was looking for? Can you give a little context on where it came from and specifically, if you can address any sort of changes you maybe seeing in Texas given the impact of lower oil prices?.

I can give you some color on that, but I regret to tell you, I don’t have the normal breakdown that I usually have on that. Of course, as -- so I’m going to be giving you a little more general guidance instead of very precise numbers.

The largest contributor to our growth in non-purchased loans in the quarter just ended was Real Estate Specialties Group, not surprising consistent with the experience we’ve had in recent years. I believe their growth was about $210 million to $220 million. So they were the largest contributor to that.

Our Leasing unit contributed about I think $10 million to $11 million of growth, Corporate Loan Specialties Group with the bonds we sold pretty much offset their growth, so they were negligible plus or minus number. I don’t know the exact number and the rest of it was in Community Banking.

I’m very pleased with the positive momentum of our Community Banking Group in the last 45 days in particular. We really seem to have found a footing there and are getting more growth, more traction there in the last 45 days than we have in anytime probably since 2007. So we are encouraged about that.

Real Estate Specialties Group continues to be the leader. Community Banking gain momentum particularly in the second half of the first quarter. Leasing, a smaller contributor looks like they’re going to grow again at based on what they did in first quarter somewhere between 30% and 40% growth rate for the year.

So, really getting good traction in all three of those units..

Okay. And then, maybe just one more if I could.

I know it’s really hard to predict the income from -- the other income from purchased loans that, should we expect to see that amount decline as you work through the assets that were acquired through the seven FDIC-assisted acquisitions?.

Well, let me provide you some commentary on that.

The number in this current quarter looked unusually high and Greg, what were -- what was that number?.

$8.9..

$8.9 million, but if you had compared that and I told you, I think that that compared to like $3.6 million average last year. But last year 80% of all of our recoveries were shared with the FDIC and went to reduce our indemnification asset receivable.

If we had all of those recovery income items following through to us and not 80% of them reducing the indemnification asset, last year our first quarter would have been $10.1 million, our second quarter would have been $9.7 million, our third quarter would have been $10.0 million and our fourth quarter would have been $6.7 million for an average of $9.1 million per quarter.

So the $8.9 million or so whatever it was that we booked in the quarter just ended, when you allow for the fact that we were no longer subject to sharing those recovery income items with the FDIC was really very consistent with what amounts we generated last year.

Your question is, well, what does the future holds and I know it’s been said, we have said a number of times that this source of income will vary quite a bit from quarter-to-quarter, it certainly will. It will undoubtedly as we liquidate all of the purchase loans, it will undoubtedly go down overtimes.

But where we stand right now at March 31 is we had $2.04 billion of purchase loans on the books, $314 million of those loans roughly $313 and change were credit impaired loans under accounting guideline SOP 03-3.

So that’s 15.4% of the loans were accounted for under 03-3 and those loans that have a carrying value of $313 million or $314 million have a current principal balance of $419 million.

So there is $105 million of discount on those loans, $78 million of that is an accretable difference and the other what would that be $27 million or so is a non-accretable difference on those loans, a credit mark.

Now all those loans if already have been written down that $419 million figure reflects the write-downs that you would take on those servicing balances based on recovery, but our carrying value is still $105 million less in that.

If those loans all payoff overtime that $78 million accretable difference will come into income as interest income if they prepay ahead of schedule whatever unrecognized amount of that accretable difference will fall in the income as recovery income plus any credit marks that are recovered from prepayment.

So those are actually pretty high performing loans, 88.4% of those loans are current today. So I will tell you I think there is many tens of millions of dollars the whole $105 million is not going to come in as recovery income over the last those loans are.

A lot of it to the extent the loans just continued to pay further amortization schedule will come in as enhanced yields as accretion income, but as loans in that group prepay or otherwise get liquidated, there is easily the chance for $50 million or $60 million of future recovery income.

All that just depends on whether they pay off for the amortization schedule that comes in as interest or they pay off in advance. In addition to that, we have large numbers of judgments and settlement agreements that have no book value whatsoever that we are collecting on or continuing to pursue that contribute to meaningful recovery income.

So I think the answer to your question is yes. This income category is going to bounce around quite a bit from quarter to quarter as result of prepayments and other factors. Yes, it will have a long-term declining trend unless we keep purchasing new loan portfolios.

If we stop purchasing portfolios, it will have a long-term declining trend over the next several years. But the number in the quarter just ended is not atypical of our results over the previous fourth quarter..

George, it is very helpful color. Thank you so much for answering my questions..

All right. Thank you..

Our next question is from Jennifer Demba from SunTrust Robinson..

Thank you..

Hi Jennifer..

Hi.

How are you?.

I’m fine.

How are you?.

Doing well, doing well. Follow-up on the loan growth color you gave for the quarter, you said about two-thirds of the growth came from the specialty commercial real estate group.

Geographically, George, did you have any concentration there, whether it be in New York or California et cetera?.

We had loans originated in New York and California and Denver and Arizona and Washington and Oregon and Florida, it was pretty well diversified..

And are you seeing any meaningful slowdown in the Texas market itself or specifically?.

Jennifer, not really. We have not seen a tremendous slowdown now.

I’m going to qualify that by saying as you well know if you look at the volume of our loans in the Texas market over the last couple of years, Texas has not been our big gross state because it has attracted so many lenders to it that prices have got to be down, leverages got to push up and we found better risk adjusted returns and higher quality assets and a lot of other states than Texas just because it got very competitively challenged there.

We have not seen a significant slowdown in the volume of applications. We are still working and underwriting new credits in Texas right now. So now we have seen a tremendous change in our line of business..

Thank you very much..

While we’re financing oil and gas rigs, I’m sure we would have seen a significant change..

Thank you..

Thank you..

Our next question is from Aaron Arnold-Wolf from KBW..

Good morning. Hope everyone is doing well..

Hi Aaron..

My questions are with regard to the $15 million to $29 million of performing loans sold over loan specialties group, for those in any particular industry, those credits?.

No. We sold three credits and they were in three very different industries. And as I mentioned, we evolved our credit standards and our underwriting standards for that group over the last 15 months. We have adopted some significantly more conservative standards than we had initially. The loans we sold would not be purchased under our new standards.

And frankly as we look at the portfolio and sort of get a retrospective on it, here at 14 months or so. We just decided that we wanted to sell everything that didn’t meet our current strategy going forward and have a really clean portfolio.

To give you an idea of that portfolio, of course, you know what is in it is, is shared national credits, syndicated loans, our average purchase price on the $98 million of loans that are in that portfolio -- I'm sorry, $92 million of loans in that portfolio at the end of first quarter was 99.34%.

So basically about 99 and the third is our cost, net of fees on that portfolio. The market price on those bonds, the weighted average bid was 100.29. Weighted average ask was 100.67 as of late last week, when I fully added together.

So we and every bond -- every loan that we own in that portfolio has a bid price equal to or greater than our cost basis in that. So we sold anything that wasn’t performing to market standards and it wasn’t improving to our new credit standards, so we feel pretty good about where we are there today..

Okay.

Would those credits have any indirect or direct exposure to energies?.

One of them did have. We had one. The smallest of the three was an energy credit and really the only direct energy credit that we have and we sold that..

Okay. Great.

And there were some shared national credits in that sold portfolio?.

They were all shared national credits. They again have not originated any loans directly. Everything we’ve done so far is shared national credit in that unit..

Okay. Great.

And were there any special -- were there any specific provisions set this quarter for those loans?.

Absolutely not. No. They are all meeting our satisfactory risk ratings. So they are accounted for, in our general provision allocations for satisfactory three rated loans..

Okay. Excellent. And one more question on loan yields.

With the one-time benefits, which contributed to the non-purchase out of 4Q for these loan yields -- I apologize, was it due to decline -- was the 17 basis point decline from last quarter reflected the more competitive pricing environment?.

It’s reflected over lot of things. One reflects the fact that we are in a very low rate environment that’s very competitive with the very flat yield curve and just the continued competitive pressures that the whole lend industry is facing.

It reflects the fact that as we originate more loans and our originated loans become a greater percentage of our total loan portfolio as compared to the purchased loans in the portfolio, particularly the purchased loans that were originated back in loss share that have extremely high yields.

As those numbers get smaller and our originations get bigger, the mix changes to where it lands the yield on loans down slightly. And it reflects the fact that our cost of interest bearing deposits went up 2 basis points in the first quarter compared to fourth quarter, so a lot of factors moving that number around.

None surprising or different from what we’ve experienced over the last couple years or so..

Great. Thank you very much for taking my questions..

All right. Thank you..

Our next question is from Kevin Reynolds from Wunderlich Securities. Please go ahead..

Good morning, Kevin..

Hey George.

How you doing?.

Doing great..

Good quarter, especially the growth, that’s pretty impressive, the organic loan growth. I wanted to shift the topic a little bit because I heard something and maybe I’m thinking too much about this.

But I heard something in the forward-looking statements that was different than the last call and with Intervest deal completed and I know you’ve got convergence scheduled for June coming up, that the statement that was made was the eventual impact of the Durbin Amendment.

And so as I look out there, you were at $8.3 billion and then you made a point to discuss the shelf registration to support your growth objectives.

We know that you have a plan to remain active in M&A, but should we use those as signals that perhaps of the historical size of the deals that you’ve done might start to get bigger? I know to have a meaningful impact as you get bigger you would think that the ability to absorb a larger bank would be more realistic.

But is it unreasonable to think that maybe the size of an M&A target maybe somewhat different than what you’ve done in the past?.

Well, no. It’s not unreasonable to think that the size of future M&A targets are getting larger as our balance sheet gets larger. It is a bit of an over assumption on your part to assume that we would settle on that to waive those things.

And the reference to the Durbin Amendment just reflects the fact that in our prior call, we’ve been asked to quantify that and we did in last quarter’s call what we thought at that time. We haven’t really redone those numbers on that, so we’re not going to update that.

But we were just quantifying in a prior call what we thought the impact of the Durbin Amendment would be. We continue to be very active in M&A. I’ll be very surprised if we don’t announce one or more and hopefully more than one transactions this year. Those could be small transactions. They could be medium sized transactions.

They could be large transactions. And our large transaction now could be larger than what we would have considered to be a large transaction 12 months ago just because our capital accounts bigger, our balance sheets bigger, our integration capabilities have developed and enhanced even from where they were so.

But no, you should not assume that because we’re approaching $10 billion that we’re looking for a $2 billion or $3 billion, or $5 billion or $6 billion acquisition, we would not rule out a $2 billion, $3 billion, $5 billion or $6 billion transaction at all.

We would be quite content to find the transaction of that scale and size that we thought was significantly beneficial to shareholders. And if we did, we would jump on it, vigorously pursue it.

At the same time, you shouldn’t be surprised if you see us announce a $300 million deal or a $500 million deal, or a $1 billion deal or even a $1.5 billion that takes us right to the lip of the cup on the $10 billion threshold, which would mean we would probably go over the next quarter with organic growth.

So, we’re going to execute our M&A strategy. We’re going to execute our basic business plan without any regard or the $10 billion threshold.

As we said a number of times before, we will cross it, how we cross it and hopefully do so with a good enough business plan or good enough acquisition strategy that we will very quickly absorb the cost of having crossed the $10 billion mark..

Okay. All right. And then I guess a follow-up on that if I could, just talking more about just your M&A, your overall M&A objectives and strategy. Your footprint today is -- or at least your lending reach today is very different, very much more expensive than it was historically.

So you’ve gone outside your core markets and you’ve got your California, New York and all.

Should we be thinking that traditional bank acquisitions would be in or adjacent to the community bank network, or is it possible that there might be sort of the bank transaction that surprises us and say, something closer to California than Little Rock or something like that hypothetically?.

The location of the acquisition is all going to be driven by return on invested equity, the economics of the transaction. If I can buy a California bank that’s going to generate a 22% return on equity forming and I could only get a 20% return on equity on our Arkansas like acquisition then I’m going to become a huge fan of California instantly.

And so it really is going to be driven by the economics of the transaction. Now when we factor in return on equity, we’re going to factor in, not just the economics of what we’re buying but what the economics of that combined energy is going to be when we put it with our company.

And that’s going to mean that if I buy a bank in California, my call center and my data center is going to be, have to be opened two hours longer. I’m going to have to hire California consumer compliance people because they have consumer laws that nobody else has.

I’m going to have to deal with the additional distance and I’m not going to have any natural synergies business wise or so forth that I would have if I made an acquisition in North Carolina, Georgia, Arkansas or Texas or any of the other states where we have existing retail operations.

So the synergies and the economies of operating in the same time zone and the same geography where you have overlapping our adjacent markets are going to tend to make the economics more compelling on an adjacent market or an end market deal than they are deal that’s three or four states away.

But if you plug in all the cost and all the benefits and the deal three of four states away still hits our ROE bogie. And a deal in market doesn’t then we are going to be traveling more than we haven’t planned. So it’s all driven by economics..

Okay, thanks. That’s helpful. Good quarter..

Thank you very much..

Our next question is from Dave Bishop from Drexel Hamilton..

Hey good morning, George.

How are you?.

I am great. Thank you..

You know, with the headline sort of the flush with some of the news of the, I guess, the General Electric maybe spinning off some of the real estate portfolio there, are you seeing more of a -- more competition in terms of in the commercial real estate base and does that sort of change your long-term view of sector in terms of being able to find acceptable risk-adjustable returns across markets?.

No, that has not changed our view, very constructive, very positive view at all. In fact what I would tell you because of the HVCRE guidelines that are included in the new capital guidelines which add another level of complexity to complex commercial real estate transactions.

I think it is actually going to reduce some bank competitors who are subject to those guidelines and create more opportunity for us. I would tell you that our path line of transactions that we are looking at today is by a considerable margin more robust than any path line of transactions we have ever looked at in the prior history of our company.

So the opportunities appear to be there in large number. The habitat that we have and the desire that we have to continue to grow that category of our business is still strong or stronger than it has ever been. So we are very constructive, very positive on that line of business..

Got it.

And then the pending conversion and data system conversion there, in terms of the additional cost saves that you enumerated how much was in the first quarter 2015, if any?.

As far as cost saves or one time or not one time but unusual cost…..

No, just in terms of I think the go forward, I forget is a 2.75 you're anticipating in terms of future benefit to expenses once you convert the core systems?.

Second quarter. Now Tyler Vance is telling me that we will begin to see a more noticeable amount of that starting in the second quarter..

Correct..

Yeah..

Got it. Thank you guys..

All right thank you..

The next question is from Matthew Olney from Stephens, Inc..

Hey thanks. Good morning guys..

Good morning Matt..

Hey I just want to piggyback on that last question as far as the expenses, I guess, we'll get more cost saves in the next few quarters from the conversions that we've discussed before.

We'll also overlap the remaining expenses from Intervest net-net, what direction do you see expenses going over the next few quarters, George?.

Well if you -- if you take the few one non-interest expense and you adjust that or the prepayment on the FHLB Advances, the acquisition and conversion cost, and Greg, was there another….

Contract termination..

Contract termination charges, those three expenses. I think that, that core number that you would be left with is pretty indicative of the run rate number, our higher health insurance costs are in there because those kicked in first of the year. Most of are raises are in there and so that is a pretty good base run rate.

In the upcoming quarter, I think you’ll see roughly a $1 million in conversion related expenses related to Intervest and kind of lapping up the data center movement so forth. So there is kind of unusual cost there. So you will have to add them back on top of that run rate of $1 million.

What I think you have is you’ve got these cost saves from our systems conversion and with the -- for example with the FNB Shelby, there were contract termination charges there and people who were running that operating system are no longer with us.

So you’ve got some cost saves there, but I think those cost saves are going to be substantially offset by increases in staff additional raises and other increases in operating costs that just come for our natural growth.

So, I would kind of -- my thinking and my hope is, as you kind of take -- if you want to adjust out those three unusual items you get to a good base, you add a $1 million on top of that to kind of get to a decent proxy for Q2.

Who knows what additional extraordinary and unusual items will have from future M&A? Hopefully, we’ll have a lot because we do a lot of M&A.

But if knowing any future M&A transactions, I would hope that would be a pretty good run rate for the rest of the year, since cost savings we get from some of these efficiencies also pretty much pay for the additional raises, additional staff and so forth going forward..

Okay. That’s helpful George.

And then as a follow-up, going back to capital, I didn’t see any preliminary risk-based capital ratios from March 31st, any commentary as far as the risk-based capital ratios?.

Our total risk-based capital is going to be our pinch point on capital. Obviously, because of the risk ratings assigned to our constructions and developments CRE loans and we are subject to the HVCRE standards now, as of January 1 those came into play. We’ve done our work on the portfolio. I will be honest with you.

There are lot of ambiguities and question marks and uncertainty about that. So we’ve taken the posture of that. If we’re in doubt, we will treat CRE loan as an HVCRE loans. Based on that, we still have considerable margin for capital. I would say capital that would support couple of billion dollars of growth, if the….

On all cash dealing….

Yeah. Yeah. So we could do, if we do an all-cash acquisition on March 31 of a $2 billion balance sheet, assuming it was kind of an average mix of assets in that balance sheet, we probably could have absorbed that level of growth.

We are in an environment where our growth potential seems to have some sizable upside room to it and hence the shelf filing..

Sure. Okay. Thank you..

Thank you..

Our next question is from Blair Brantley from BB&T Capital Markets..

Good morning, George..

Hi..

A couple different questions.

First on the M&A front, any change in looking at Texas banks given the kind of pullback from evaluations there then trying to reach our deals?.

We commented it in the last call that we would love to do acquisitions in Texas and certainly the valuations on Texas bank used to trade it at couple of multiple premium, maybe you are trading at a multiple discount or more in line with banks elsewhere now.

And my comment in the last call was, if I were sitting in the Board room of a Texas bank and on the board of the Texas bank, our stock had gone from $50 a share to $35 a share.

I would look at it and look at the Texas economy and how strong the economy is and view that pull back most likely as a temporary phenomenon and would put on plans -- put on hold my plan to sell. And last there were real issues of management succession or asset quality or capital or something else in my bank that were causing me to sell.

So having most of the Texas bankers are going to think highly enough of their franchise. They are not going to want to sell at a substantially different price today than they would have sold for six months ago because I suspect there is a confidence in our Texas swagger, if you will, that those values will come back.

So we would love to make acquisition. I think that the pull back in pricing down there is not going to accept in our isolated case to be very helpful or constructive to getting the build on it..

Okay. Thanks for the color. And then just a follow-up, going back to the operating expenses, you had mentioned if you take out some of the one-time items in the quarter that’s kind of a decent core -- good run rate.

Is that -- so does that include the anticipated cost savings from Intervest? You talked about 20% to 25% in the first year and then 25% to 30% thereafter?.

Yes. And here is the thought on that. Number one, Intervest was in our first quarter for 49 days, so there is another 41 days or 40 days or 39 days, I guess, Q1, of Intervest cost, that you got to deal with in Q2. So you’re going to get some cost savings but you’re also going to add in the other four-ninths of the quarter that you didn’t have in Q1.

And we are adding people in real estate specialties group. We are adding people in other unit. So as I said, I think all the cost saves we get from Intervest and the systems conversion, you probably don’t see those come through in lower non-interest expense.

You see those things basically offsetting what would be increases in non-interest expense as we add additional people in real estate specialties group and risk management in other areas in the company that you’ve got to add people to grow our business. So I think my hope is to kind of get to a core baseline number.

We can generate enough cost savings over the course this year to keep that core baseline number pretty close to flat as we grow our business and add people and talent, other things we need to add to grow our business..

Okay.

And then one more on the expenses, the OREO expenses you had this quarter, how is that as compared to in 2014, if you didn’t have that loss recoveries? Is it pretty comparable?.

Yeah. And I actually gave that number in my prepared remarks. And I talked about OREO expenses in the context of our total loan collection repo, OREO, legal expenses related to that. And our bad debt number was $3.9 million in the quarter just ended compared to quarterly average of $1.1 million per quarter in 2014.

So that was up $2.8 million compared to the quarterly average last year. Our provision expense for purchase loans was up $500,000. So if you kind of look at those items, combined all of those items, they were up about $3.3 million. Obviously, our recovery income of -- other income on purchase loans, gains on sales line items were up even more.

And no one asked about gains on sale line items but probably I’ll provide a little color on that. We had $32 million in foreclosed assets on our books at the end of the last quarter and the appraised value of those assets in real round numbers is approximately $50 million.

So even if you are saying, we sell things at 90% of appraisal, that would still indicate $10 million to $15 million of potential gain on sale income from that portfolio of foreclosed assets that possibly come in income as gain on sale over the next several year, so another potential good -- source of good moves by us..

Okay. Thank you, George..

Thank you..

We have a question from Brian Martin from FIG Partners..

Good morning, George..

Hey. Good morning, Brian..

Hey George. You guys -- maybe not yourself but someone, I thought mentioned kind of the loan growth trajectory that’s been playing out over last couple of years.

I mean that kind of a percentage growth in the first quarter relative to your previous years then I guess do you see that as being continuation of this year? I mean, it’s just a pretty lofty number in the loan growth..

That is the multi billion dollar question, isn’t it? Historically, I mean, first quarter has just been a pretty anemic quarter of loan growth and the last two years, it’s been better than it was in previous years and even in those years it was only 8% or 11% of our total growth in non-purchase loans and leases for the year or so.

Obviously, if you assume that ratio continued, you would get an outlandishly favorable growth number. So, I don’t know how to even respond to that. We are not revising our guidance, which is we expect to exceed last year’s $1.35 billion in growth. Clearly the fact that we’ve filed our shelf registration statement suggests to the lessen of it.

We are thinking about those scenarios that would be much more robust than that because obviously we are $2 billion of growth capacity within our existing capital price. I would need capital if we are only going to grow the non-purchase loans of $350 billion this year or so.

So, we are just beginning to prepare for the possibility that a really positive scenario could develop on that loan front. I’m not ready to change our guidance on that because you’ve got to get these things and if you’ve got to get them close, you’ve got to them growth and you’ve got to get them funded.

But as I said earlier, we’ve got the best toplines today compared to any time in history of our company by considerable markets. So opportunities today we’ve got to execute and capitalize on..

Got you. Okay.

And then the payoffs this quarter you talked last quarter about them being a little bit heavy in the fourth quarter, payoffs pretty normal this quarter?.

Yes. Q1 payoffs were probably a fairly typical number. Let me give you one other piece of data that maybe helpful to you and I’m not going to try to guide you into what numbers to put in loan growth in Q2, Q3 and Q4 of this year.

But I will tell you that as we are looking at our loan funding forecast on all the loans that are on the books and we are looking at topline, I think that we may have a little different sequencing of growth this year. Traditionally, the second quarter has been our biggest quarter of growth and I actually think Q2 will be better than Q1.

But I don’t think it will be our biggest quarter of growth for the year. I think Q3 will get bigger and Q4 will get even bigger.

So based on the loans that are closed and on the books and how those construction projects lay out and how you would expect draws to occur on those loans, we ought to have an accelerating loan volume over the course of the year based on our current expectations.

And I know if you look at the consensus analysts’ estimates, there seems to be a big jump from Q1 to Q2 and then a lesser jump from Q2 to Q3 and Q3 to Q4. And I haven’t really dug into everybody’s models but I would assume that sort of predicated upon the normal assumption that our peak loan growth for the year occurs in the second quarter.

So if you are modeling in that way, you may have modeled too much income in Q2 and not enough in Q3 and Q4, which might suggest a more sort of linear expectation regarding EPS numbers would be instead of a bump and then a declining trend, just a thought..

Got you. Okay, thanks. That's helpful. And just maybe the last two items real quickly, just the asset sensitivity with Intervest.

I think, does that change much and then maybe just any comments on, I guess, I thought that the tax rate may be trending higher and maybe that's the case later in the year as well with Intervest?.

Yes. Well, the Intervest portfolio is almost exclusively a big straight portfolio. And we’re working with them to as I originate new loans to shorten the average duration of that which I think we will have some success in doing that.

They made a lot of five year and a few loans beyond five years fixed rate, probably the average life of that portfolio is probably about three years, I would imagine at this point. And I’m guessing at that just from my impression from the loans I’m seeing from them that are been modified and renewed on a week-to-week basis.

So that will reduce our asset sensitivity a bit. On the other hand, I think we mentioned in the prepared remarks that we are now 73.1 or 73.2 variable rate loans in the portfolio. And at March 31, if you took our entire non-purchased portfolio, 79% of that portfolio reprises in a year, 83% reprises in two years and 87% reprises in three years.

So we don’t have a lot of interest rate risk in the loan portfolio, which was one of the things that allowed us to take on that Intervest portfolio without being concerned about the impact on interest rate risk.

Greg, you want to add some comments on?.

Yes. Just really quick, Brian. You’ve seen our 10-K, so you’ve seen our earnings simulation model results. And they clearly show that we our assets sensitive in our rising rate environment. Again, the George’s point that gave us the ability to do the Intervest acquisition knowing that portfolio was entirely fixed rate or almost entirely fixed rate.

So that would have the tendency to lower those asset sensitivity results in our model with the Intervest acquisition but we still believe our models will show us to be asset sensitive. On your other question dealing with tax rate, I can’t give you some detail on some data points with respect to our tax rate as well.

I’ll just comment that typically, our first quarter effective tax rate is lower than our tax rate for the remaining quarters of each year or for the full year. And again, that’s ignoring the impact of any unusual items of tax exempt income or expense.

This is primarily driven by the timing of our tax extension filing, which we do on or before March 15.

In those filings, we update our state income tax apportionment rates based on the most recently completed year and as usual, once again in 2015, the update of our apportionment rates had the impact of reduce in our blended federal and state effective tax rates.

If we continue to apportion a larger portion of our taxable income to states where the states either don’t have any income taxes or there are states with lower tax rates and they have the tendency to drop down our effective rate. You can see that phenomena. You’re in the first quarter of the impact on our effective tax rate in recent years.

If you go back to 2013, our effective rate in the first quarter was 29.9%. It increased to 32.8% by the fourth quarter and was 30.6% for the full year of 2013. Likewise, in 2014, our tax rate for the first quarter was 25.7%, it increased to 33.2% by the fourth quarter. It was 31.5% for the full year ‘14.

So and both those years, both ‘13 and ’14 included unusual items of tax income primarily the bargain purchase gains on the Shelby acquisition in the third quarter ’13 and the Bancshares and Omnibank acquisition in the first quarter of ’14. So those are impacting tax rates as well.

During the first quarter of ‘15 there were three items I would kind of point you to that did have some impact on our effective tax rate. First is, as I’ve just discussed, we updated our income -- our state income tax apportionment rates in conjunction with filing our tax extensions.

So that have the impact of reduce in tax expense a little bit during the quarter. Second, we had the $2.3 million of tax exempt BOLI death benefit income. So that had the impact of increasing the percentage of our tax exempt income to total taxable income in the first quarter again lowering our affective tax rate.

And third, we -- and we’ve done this in recent quarters as well, occasionally, but we had a -- we filled an amended some -- some amended state income tax returns for certain prior years one state where we operate that resulted in some state income tax returns. So collectively each of these items reduced our first quarter effective rate to 31.3%.

And then, so if you take that and say, what does that mean going forward, what will we project our effective tax rate to be for future quarters and for the full year of 2015, currently we would expect that our tax rate will probably range from about 33% to 35% in each remaining quarter and for the full year.

And again that rate could be significantly impacted by any unusual items of tax exempt income or expense..

Okay. Thanks a lot, Greg..

All right.

Other questions?.

We have another question from Aaron Arnold-Wolf from KBW..

Hi. Yes.

George, how much of the loan growth was attributed to the Intervest transaction?.

Essentially none, I mean, I think, we booked a couple of loans there post-closing, but nominal, nominal number..

Okay. Great.

And one last question, how much of the increase in salary expenses in Q1, total operating expenses was due to Intervest and how much was due to performance or seasonal things?.

I don’t have a breakdown for that number, I apologize..

It’s okay. Thank you..

And at this time we have no further questions..

All right. If there are no further questions, thank you for joining the call. We appreciate you being with us today. We look forward to talking with you in about 90 days. Thank you so much. That concludes our call..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..