Bank Ozk (OZK) 2011 Q4 法說會逐字稿

Good day and welcome to the Bank of the Ozarks Inc. fourth-quarter earnings conference call. (Operator Instructions). As a reminder, today's call is being recorded. At this time I would like to turn the call over to Ms. Susan Blair. Please go ahead, ma'am.

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 fourth quarter and full year of 2011 and our outlook for upcoming quarters and year. Our goal is to make this call is useful as possible in understanding our recent operating results and future plans, goals, expectation, and outlook. To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook for the future, including statements about economic, real estate market, competitive, credit market, and interest-rate conditions; revenue growth; net income and earnings per share; net interest margin and potential for further improvement in our costs of interest-bearing deposits; 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 foreclosed real estate, including foreclosed real estate covered by FDIC loss share agreements; 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-offs and our net charge-off ratio; our allowance for loan and lease losses; loans, lease and deposit growth, including growth in our legacy loan and lease portfolio through 2014; 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, including achieving bargain purchase gains associated with such acquisitions and other 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 caption of the management's discussion and analysis section of our periodic public reports, the forward-looking statements caption of our most recent earnings release, and the description of certain risk factors contained in our most recent annual report on form 10-K, all as filed with the SEC.

Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements, and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

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

Good morning, and thank you for joining today's call.

Our excellent fourth-quarter results provided a wonderful finish to a great year. 2011 was our 11th consecutive year of record net income. Our results for the fourth quarter and full year of 2011 included record quarterly and annual net interest income, our best quarterly and annual net interest margin as a public company, record quarterly and annual service charge come, favorable asset quality results, and growth in non-covered loans and leases.

We have a lot to talk about today, so let's get to the details. 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 in the quarter just ended. This combination helped us achieve record quarterly net interest income of $45.8 million in the fourth quarter, giving us our sixth consecutive quarter of record net interest income. In fact, our fourth quarter net interest income increased $1.5 million or 3.4% from the immediately preceding quarter.

Over the last three years we have achieved very favorable improvements in our net interest margin. This continued in the quarter just ended, as our net interest margin increased to 6.05%, up 15 basis points from the immediately preceding quarter and up 70 basis points from last year's fourth quarter. The 15 basis point improvement in our net interest margin in this year's fourth quarter compared to this year's third quarter is primarily due to higher yields on noncovered loans and leases, which increased 11 basis points, and lower effective rates on all three categories of interest-bearing deposits, which collectively decreased 13 basis points.

Our significant net interest margin improvement over the past several years is a result of a team effort. Our deposit pricing committee has done an excellent job understanding our markets and competition while focusing on profitability. Our retail banking team has done great work in dramatically improving the mix and profitability of our deposit base.

On the other side of the balance sheet, our lending and leasing teams have continued to achieve good pricing on loans and leases in our legacy markets, and our teams working legacy markets and our teams working on FDIC-assisted acquisitions have added large volumes of covered loans with excellent yields.

Before we leave the subject of that interest margin, let me address one point that I think may not be fully appreciated. Our favorable net interest margin is not just a result of the excellent yields on our covered loans from FDIC-assisted acquisitions; that's only part of the story. Our net interest margin would be excellent, even without the extra boost from our covered loans. For example, in the quarter just ended, the spread between our yield on noncovered loans and leases and average cost of interest-bearing deposits was an enviable 5.73%.

Over the last three quarters, our net interest margin has been 5.80%, 5.90%, and 6.05%, respectively. We believe that that range, a range from 6.05% to 5.80%, is the likely range in which our net interest margin will fluctuate over the course of 2012. Of course, additional FDIC-assisted acquisitions could provide a further boost to net interest margin.

Our growth in average earning assets over the last two years has primarily been due to loans acquired in our seven FDIC-assisted acquisitions. Of course, the majority of such loans had been covered by FDIC loss share agreements. We are very pleased with all of our acquisitions to date, and we certainly hope to do more FDIC-assisted transactions.

With that said, we are also diligently working on business development and growth in our legacy loan and lease portfolio. We were pleased with the $61 million of growth in noncovered loans and leases in the third quarter, and the additional $22 million of growth in noncovered loans and leases in the fourth quarter. We are extremely well positioned from both a financial and competitive perspective, and we want to capitalize on our strong position to add new customers and build quality relationships.

With this strong position and our focus on growth, we believe that we can achieve our previously stated goals of net growth in noncovered loan and lease portfolios of $20 million per month on average in 2012, $30 million per month on average in 2013, and $40 million per month on average in 2014, all while still adhering to our traditional conservative credit principles.

As we have discussed in recent quarterly conference calls over the past two 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 from FDIC -- for FDIC assisted acquisitions. The aggregate size of our investment securities portfolio was essentially unchanged during the quarter just ended. Further reductions in our investment securities portfolio, if any, would likely be limited, since we are approaching the minimum portfolio size we need for our routine balance sheet management functions. Of course, as we've said many times, we will be a buyer of investment securities when we believe the compelling values create a favorable buying opportunity, and we will be a seller of investment securities when we believe it is time to sell.

Let's shift to non-interest income. Income from deposit account service charges is traditionally our largest source of non-interest income. Service charge income in the quarter just ended increased 4.3% compared with this year's third quarter and 22.8% compared to the fourth quarter of last year. In the full year of 2011, service charge income was up 19.4% in 2010.

Our recent results are particularly pleasing considering the new regulatory guidelines, which became effective July 1, 2011, and reduced our NSF/OD fee income in various ways. We implemented measures to mitigate the impact of these regulatory changes on service charge income, including expanding customer utilization of various fee-generating products and services, and selectively increasing certain fees. These actions, combined with our growth in core deposit customers, allowed us to achieve record service charge income in both the fourth quarter and the full year of 2011, even after implementing the new regulatory guidelines.

Mortgage lending income in the quarter just ended was our best quarter of mortgage lending income in 2011, but it was down 23.3% from last year's fourth quarter. Our volume of home purchase financing continues to reflect the relatively subdued housing market. The recent Federal Reserve actions have created an environment more conducive to mortgage refinancing. Increased refinancing activity largely accounted for improvement in our mortgage lending income from the third quarter to the fourth quarter just ended. For the full year of 2011 mortgage lending income was down 15.2% from 2010.

Trust income in the quarter just ended was also our best quarter of trust income in 2011, but decreased 8.7% compared with last year's fourth quarter. For the full year of 2011, trust income was down 5.9% from 2010. Our lower trust income in 2011 compared to 2010 was 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. Municipal bond issuance was at very low levels in 2011.

We had net losses on investment securities of $56,000 in the quarter just ended compared to net gains of $226,000 in the fourth quarter last year. For the full year of 2011 net gains on investment securities were $933,000 compared to $4,544,000 in net gains in 2010. Of course we were a much more active seller of investment securities in 2010.

Net gains from sales of other assets were $899,000 in the quarter just ended compared to $571,000 in last year's fourth quarter. For the full year of 2011, net gains from sales of other assets were $3,738,000, compared to $802,000 in 2010. Net gains realized in the fourth quarter and the full year of 2011 were primarily attributable to gains on sales of foreclosed real estate covered by loss share agreements, or covered OREO, as we call it. When we acquire such foreclosed real estate 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 of covered OREO is not accreted 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 discount of that asset.

We've discussed this in recent conference calls, and we mention this again to point out that while gains on sale are normally considered an unusual item, we are likely to see gains on sale in future quarters for some time to come. This has been evident in each of the last six quarters and is in part due to the accounting associated with covered OREO, specifically the non-accretion of the related net present value discount.

In the quarter just ended we recorded $2.36 million of income from accretion of our FDIC loss share receivable net of amortization of our FDIC clawback payable. As part of our FDIC-assisted acquisitions we record a receivable from the FDIC based on expected future loss share payments, and we recurred a clawback payable to the FDIC based on estimated sums we expect to owe the FDIC at the end of the loss share periods.

The FDIC loss share receivable and the related clawback payable are discounted to a net present value utilizing a 5% per annum discount rate. The discount amounts are then accreted in income over the relevant time periods, and in the quarter just ended, the resulting net accretion income was $2.36 million, down from $2.86 million in the immediately preceding quarter. This accretion income will be an ongoing income source for us as long as we are under the loss share agreements. Of course, the amount of net accretion income will tend to diminish over time as loss share winds down.

In addition, non-interest income in the quarter just ended included other loss share income of $1.50 million. This line item includes certain miscellaneous debits and credits related to accounting for loss share assets, but it consists primarily of income recognized when we collect more money from covered loans than we expected that we would collect. We refer to the additional sums collected as recovery income.

Since we tend to be conservative in the way we value covered assets, which is certainly appropriate given the uncertainties surrounding many of those assets, it is likely that this other loss share income 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.

We believe that our accounting, including our valuation for covered assets in connection with all seven of our acquisitions, has been appropriately conservative. You can see our conservative philosophy in four line items on our income statement.

First, the 8.56% effective yield on covered loans in the quarter just ended reflects the substantial discount rates we utilized 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 utilized 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 previously discussed, reflects the fact that our lending and special assets personnel have done a great job maximizing recoveries from covered loans. And fourth, our gains on sales of other assets for the reasons previously discussed reflect the conservative accounting for covered OREO and the effective work of our staff in selling these assets.

The profitability metrics of our three FDIC-assisted acquisitions in 2011 suggest to us that favorable acquisitions can still be made utilizing our approach, which involves actively looking at numerous opportunities while being very conservative in our underwriting and bidding. We've been the winning bidder on approximately one out of every 10 or 11 opportunities on which we have bid, and we've only pursued transactions which we thought could make profits on both the acquisition and the ongoing operations of the acquired assets. We believe we will continue to see many opportunities for FDIC-assisted acquisitions.

Now let's turn to non-interest expense, which increased 16.1% in the quarter just ended compared to the fourth quarter of 2010. Our fourth-quarter non-interest expense included acquisition and conversion costs of approximately $0.8 million, which was the last unusual overhead expense of any significance we expect to incur related to our seven acquisitions to date.

With our systems conversions completed and follow-up training done at all seven of our acquisitions, our non-interest expense in the first quarter of 2012 should reflect a more normal level. Of course, new acquisitions could create a whole new set of the unusual expenses and revenue.

While non-interest expense increased 40.2% in 2011 compared to 2010, we were pleased with the $3.4 million reduction in non-interest expense from the second quarter to the third quarter of 2011 and the additional $2.5 million reduction in non-interest expense from the third quarter to the fourth quarter of 2011.

You may recall that in the second quarter of 2010 we incurred a large volume -- or, sorry, 2011 -- we incurred a large volume of acquisition-related costs and higher than normal write-downs related to non-covered other real estate owned. We expect that these elevated non-interest expense levels would come back in line over the next several quarters, and we have seen good progress in that in that regard in each of the past two quarters.

Excluding any increased non-interest expense resulting from additional acquisitions, we are targeting further reductions in non-interest expense in the coming quarters from the level in the quarter just ended. With that said, we are still continuing to grow and expand our franchise. For example, in January, we opened an expansion office in Austin, Texas, for our real estate specialties group. That was on January 3.

In February we expect to open our ninth metro Dallas area office in The Colony, Texas. In the second quarter of 2012, we expect to open our fourth office in Hot Springs, Arkansas. In the third quarter of 2012, we expect to open our second office in Mobile, Alabama, and in the fourth quarter, we also expect to relocate our longtime Charlotte, North Carolina, loan production office to a new full-service banking office we will be building in Charlotte. We are also working on a potential relocation of our office in Bluffton, South Carolina, from our current lease facility to a new facility we hope to purchase.

One of our long-standing and key goals is to maintain good asset quality. Economic conditions over the last four years have made our traditional strong focus on credit quality even more important. Our asset quality ratios improved in 2011 as we had expected, and consistent with the guidance given in our January conference call last year. Specifically, our next charge-off ratio for non-covered loans and leases decreased 12 basis points, from 81 basis points in 2010 to 69 basis points in 2011.

Our net charge-offs decreased $2.6 million for the year, from $15.4 million in 2010 to $12.8 million in 2011. Our provision expense decreased $4.2 million for the year, from $16 million even in 2010 to $11.8 million in 2011.

Excluding covered loans, our ratio of nonperforming loans and leases to total loans and leases decreased 5 basis points during the year, from 75 basis points at year-end 2010 to 70 basis points at year-end 2011. Excluding covered assets, our ratio of nonperforming assets to total assets decreased 55 basis points, from 1.72% at year-end 2010 to 1.17% at year-end 2011.

Excluding covered loans, our ratio of loans and leases past-due 30 days or more, including nonaccrual past-due loans and leases, decreased 46 basis points, from 2.02% at year-end 2010 to 1.56% at year-end 2011.

While these are ratios and amounts have fluctuated from quarter to quarter, over the course of the full year of 2011, every one of these ratios and amounts showed improvement compared to 2010. We were very pleased with this improvement in our asset quality metrics.

In 2012 we expect to see further improvements in our next charge-off ratio compared to 2011. While we do expect our next charge-off ratio to improve in 2012, we actually expect our provision expense to go up in 2012 because of the strong growth we are projecting in non-covered loans and leases. Of course, we don't mind incurring higher provision expense if the increase is due to growth in our portfolio of quality loans and leases.

Before we close today, I want to offer a few comments about the growth in our capital, which has increased significantly through retained earnings in recent years. Specifically, our book value per common share has increased 136% over the last five years, from $5.21 per share at year-end 2006 to $12.32 per share at year-end 2011.

Essentially all of this growth has been through retained earnings. This would be a noteworthy accomplishment in normal times, but is particularly gratifying considering that we've been through the most severe economic downturn since the Great Depression. Our common stockholders' equity to total assets ratio as of the most recent quarter end was over 11%, even after making seven acquisitions in the last two years.

We believe that we will have numerous opportunities over the next several quarters to profitably deploy our accumulated capital, and the most immediate capital deployment opportunity we foresee continues to be additional FDIC-assisted acquisitions. The second most immediate opportunity is expected to be growth in our legacy loan and lease portfolio, which we saw signs of in each of the last two quarters.

The third opportunity we expect for capital deployment relates to traditional M&A activity, an area in which we have not traditionally focused, but which may prove to be a very favorable opportunity for us in the future. The fourth opportunity will likely come whenever interest rates increase significantly and we consider it timely to reload our investment securities portfolio.

In closing, let me state that our goal for the first quarter of 2012, and we believe it is a reasonable goal, is to achieve net income, exclusive of any bargain purchase gains and related costs from any additional acquisitions, in excess of $16.5 million. In previous years we have noted that the first quarter is often the most challenging quarter of the year, due to seasonal headwinds for service charge and mortgage lending income and the impact of the fewer number of days in the first quarter on net interest income. Even considering these seasonal headwinds, we consider $16.5 million in net income a minimal level of earnings we would like to achieve in the first quarter.

Our second goal is to improve on that level of earnings in each succeeding quarter of 2012. We think that is also a reasonable goal. We certainly hope to do more FDIC-assisted acquisitions, and if we do more, such transactions could result in 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). Robert Madsen, Stephens Investment Bank.

Congratulations on the quarter and the year. Just wanted to get some color from you on the failed bank M&A. We've kind of seen a slowdown in the pace of bank failures in the southeast, and just interested in your thoughts on this trend and how you view M&A -- or failed bank M&A -- in the coming year.

We are continuing to be very active in our due diligence efforts on opportunities. We continue to believe there will be numerous opportunities. The last time I looked at it, there were still 844 banks on the FDIC's problem list. Our belief is that somewhere between 25% and 33% of those banks will ultimately be opportunities for acquisitions and failed bank transactions. And we would expect that that would result in somewhere around 200 to 250 acquisition opportunities over the next several years.

We would expect roughly half of those would be of a size or in a geographic location that would be interesting to us. So we think we will have a lot of opportunities to look at deals over the next two years and expect to continue to be very actively involved.

Thanks for that. Is there a point at which -- or at what point does it make sense to start getting more active or looking at the live bank M&A deals?

Well I think the that answer to that question will be more clear to us as we go through this year and see what happens to the pace and our success rate on our bid for failed bank acquisitions.

We have created a new position here. Dennis James, who is a CPA and has run, for a number of years, our metro Dallas division -- the retail side of (technical difficulty) Dallas, is taking and will assume on the 30th of this month a new position, Director of Mergers and Acquisitions. It's is really a job well suited to his prior background and experience before he joined our Company.

And that reflects the fact that we are devoting additional resources to looking at live bank M&A opportunities. And as I mentioned in our prepared remarks, I think that will be a more important part of our strategy in the future. Now, whether that is an important part of our strategy that materializes and results in opportunities for us in the second third or fourth quarter of this year, or that's something that materializes and becomes more important to us in 2013 or 2014, will depend on a lot of factors. And one of those factors will be how successful we are with our FDIC-assisted acquisitions.

If we turn around and were to make a substantial acquisition of another big -- a big acquisition, like we did in the Park Avenue acquisition in 2011, that would probably consume enough of our resources that it would kick the ball down the road several quarters on our willingness to consider live bank acquisition.

If we make several big acquisitions, that could kick the ball down the road a year or two. So, it really is -- the timing of it is uncertain, because it's going to depend on a lot of variables and other opportunities. But we are of the belief that there will be meaningful, profitable, accretive live bank transactions that we'll be able to do sometime over the next several years. So we are beginning to focus a little bit more resources that direction.

David Bishop, Stifel Nicolaus.

As you look out in terms of the guidance, in terms of the loan growth on the monthly basis for 2012, 2013, a little bit of a slower pace in the fourth quarter there. Maybe talk about where you're still seeing the growth coming from in terms of your market? Were there any significant pay downs that impacted the quarterly growth this quarter?

We did have two large pay downs. We had an apartment project in North Carolina that was a $22 million pay down, and great credit, and the customer wanted to do a pretty substantial cash out refinancing, and we are not much into cash out refinancing. So, even though it was a wonderful project, we just -- we liked it with the leverage we had on it and not at a higher level of leverage.

So that refinanced and left us, and we got paid off on a healthcare property down in Texas. It was I think it was $9 million or $10 million that I'm not sure exactly why that went away. So, we had a couple of big pay downs that we were not expecting in the quarter when we started in to the quarter, and that tended to diminish what was otherwise a pretty good volume of new originations.

Now, one thing that I will tell you, we are doing a lot of construction and development financing. We're very excited about the pipeline of deals that we've closed in the last couple of quarters, and the pipeline that we have going forward -- which the pipeline is much larger now than it has been at any time in 2011. So, we are feeling very good about that.

As you know, we tend to get 30%, or 35%, or 40% equity in our typical deals. And as a result of that, a lot of the stuff that we closed last quarter and a lot of the loans that we'll close in the first quarter of this year won't see much funding until Q2 and Q3, because there is -- the equity requirements are so high that the land costs and a number of the monthly draws up front will be funded purely by equity before we begin to fund the debt in those transactions.

So we are feeling very good about our growth prospects. We are feeling very good about the business we are seeing in the pipeline. I'm just having to temper my expectations to see those balances materialize on our statement, realizing that a lot of this is construction business, and with the big cash equity up front, which we certainly want; it just takes a while before we begin to see those balances register on our balance sheet.

And in terms of that outlook and the pipeline there, as your lenders talk to your commercial borrowers there, are you seeing any sort of brightening in terms of their outlook and optimism for business conditions moving forward?

I would say yes. I don't want to overstate that because I think we are still in a fairly sluggish economy. I think most of our customers think we are still in a fairly sluggish economy. Nobody is jumping up and down and throwing confetti in the air and thinking that we're in an environment where you can just say, let the good times roll.

We are certainly not in that kind of environment, and I don't see us being in that kind of environment for many years. I think the economy will have a fairly muted growth rate going forward. And I think that's what we've built into our model, and that's what most of our right-thinking customers have built into their models.

It's going to be an environment where thoughtful, carefully laid and made decisions and plans are going to be rewarded, but you've got to be careful. And there are opportunities out there, but you've got to be careful and make sure that you're not getting ahead of yourself in this economy.

Michael Rose, Raymond James.

Just a question on the noncovered loan yield this quarter. What drove the increase? Was it the growth in construction loans that you've talked about?

Part of it was growth in construction loans. There was a little bit of a quarter to quarter flop. You may have noticed that our nonaccrual loans went down about $10 million, and that was the loan we talked about in the last conference call down in Texas that we said we had just been in kind of full body contact negotiations with that customer, and I won't go through all that again unless you want me to.

That was the $15 million loan that had been under contract for a couple of quarters?

No. It's a $10.5 million loan that went nonaccrual. It hit --

Oh, that's right.

It hit 90 days past due on September 30, I think, and went nonaccrual, and I mentioned that we've been negotiating through five different lawyers with this customer, and he had filed a lender liability suit against us with the fourth lawyer, and then filed bankruptcy with the fifth.

We just held to our guns, and after it became apparent that all of his antics were not going to get us to change, or loan him any more money, or release our cash collateral, or alter the terms of our loan, with bankruptcy court blessing he dismissed his lawsuit, paid all of our accrued interest, paid all of our legal fees, extended the loan -- we've got a cash reserve from the customer that covers interest and taxes for a couple of years, and he's actually sold two lots in that project.

So that project went from nonaccrual on September 30 to accruing status, fully current, fully paid up with reserves from the customer's money for future years, all of our legal fees and collection costs fully repaid to us.

So, in the fourth quarter we had about 180 or 210 days of interest -- whatever it was. I guess about 210 days of interest recognized on that. In the third quarter, we had zero days of interest recognized on that, plus a reversal of about 30 days of accrued interest from the trailing quarter that got reversed in Q3. So that tended to move the yield a couple of basis points from quarter to quarter on the noncovered loans.

Other than that anomaly, the rest of it was just normal stuff.

Okay. And then if I could -- if you could kind of give us a little more color on the loan growth targets, maybe as you look at it by category and by geography over the next couple of years? I know you reiterated the 20%, 30%, and 40% for '12, '13, and '14, but a little color or context would be helpful.

Well, as I said in the last conference call, and I'll reiterate it again, I think the largest part of that growth is going to come from our Texas offices; the second largest part of that growth I would expect to come from our Metro Little Rock area offices; and the third largest part of the growth I would expect to come from our metro Charlotte office.

And you saw that in the last quarter. At December 31, our Texas offices accounted for 41.8% of our total loan portfolio. So, certainly the growth in the last quarter -- actually, more than the growth in the last quarter came from Texas. We actually had shrinkage in our Charlotte part of the portfolio, our North Carolina part of the portfolio, which went down to 3.5% of our total portfolio because of the big apartment pay down that I just mentioned.

So, Texas, Dallas area predominantly; secondarily, Austin. So Texas is number one. Little Rock will be number two, and I would expect Charlotte, despite the pay down and the shrinkage in their portfolio in Q4, to be a source of growth in the coming year.

The portfolio will continue to be predominantly real estate driven, as it always has been. You know, we're running about 88% of the portfolio in real estate loans, and we would expect construction and development and commercial real estate to be the largest drivers.

In the quarter just ended at December 31, construction and land development was 25.4% of the portfolio. That was up from 23.4% prior quarter, and of course, multifamily went down from 8.7% to 7.5% based on that large payoff.

And the CRE part of the portfolio went from 37.0% of the portfolio at September 30 to 37.6%, up 0.6% at December 31. So we are primarily a real estate lender. We are primarily a construction development CRE and a multifamily leader within that context. And I would expect to see the vast majority of the growth occur in the construction and development commercial real estate book. Consistent with where it's always come from us -- many many (technical difficulty).

Jeff Bernstein, AH Lisanti.

Just a little follow-up on the construction lending, since that has sort of become anathema for others. Can you just give us a little bit of color on the kinds of projects that you're doing? It seems to me now is actually a great time to do construction lending, but who are the competitors out there, and what kind of loans are you making?

Well, we are making all sorts of loans. We are making land loans. We're making occasionally lot loans, but doing more of land financing in that land and lot book than lots right now.

We do constructions for apartments; we do constructions for office. We do construction for warehouse; we do construction for industrial; we do construction for healthcare. I mean, it's a very diversified book. I would refer you to our tables in our 10-Q, and in the future, in a month or two, our annual report. We give a significant geographic breakdown of the portfolio by product type. We give a significant breakdown of different product types within the construction and development book and by product types within the CRE book.

What I would tell you about the fact that construction development CRE have been the downfall of a lot of banks is, we've said for years we do this much differently and much better than most banks. A lot of banks said that, and I think the banks for which that is true, it is now evident. There are not many of us. And for a lot of banks, that has proven to be untrue. They really weren't very good at it, and they didn't have any competitive advantage or unique skill set in it.

But if you look back at the history of our charge-offs as a public company, which goes back to 1997, we have never had a year as a public company when our net charge-off ratio has equaled or exceeded the industry average charge-off ratio. And over the last 10 years, our net charge-off ratio has been 40% of the industry average, and it's probably -- if you look back to the entire life as a public company, it is probably somewhere right around 40% -- 38%, 39%, 40% type range of the industry average.

So we have consistently, over an extended period of time, had a charge-offs experience vastly better than the industry. We've never had a year where we've been higher or equal to the industry. So, we've always outperformed the industry.

And one of the most significant reasons for that, as I mentioned earlier and I was talking about the funding of loans, we tend to get a lot of cash equity in our transactions. And in the Q or annual report, underneath the table on construction and development loans, the next paragraph talks about interest reserves, and toward the end of that very long paragraph, it discusses our equity requirements on loans.

And I think as of the last quarter end, the average construction and development loan that we had had 39% cash equity. I believe it was 39% cash equity in it. And on a loan to value basis, I think we had about 46% or 43%, something like that, equity on a loan to appraisal basis. But we get a lot of cash in the vast majority of our projects, and that has tended to help us maintain the quality of our portfolio at very high levels.

A quick follow-up question. BankUnited basically put together to do acquisitions, to take advantage of the FDIC deals etc. etc. -- they're going to sell the bank. You still seem to be very optimistic about your outlook for growing that way. What's different about your footprint, about the organization, about the size deals you can do? What's different about Bank of the Ozarks that makes this is still a great opportunity for you?

Well, I know nothing about BankUnited at all. I'm not familiar with that bank at all, so I can't comment at all about what's different.

I think our track record and the results that we've achieved, the profits that we've made on those transactions in day one, the profits we've made on those transactions on an operating basis, the very detailed disclosures and results that you can see in our Q for how we are successfully liquidating and working through those portfolios and generating substantial income as we are doing it, says that we are good at it.

We've got a very, very good process that's probably as good or better than anybody else's out there that is doing this sort of thing. Certainly as good as anybody else. I think that speaks for itself. So I wouldn't attempt to compare us to anybody else, particularly someone I don't know. But we think that we've done a really good job for shareholders with the acquisitions to date. We think there are a lot more opportunities out there, so we're going to continue to pursue them.

Joe Fenech, Sandler O'Neill.

George, do you see any additional room here to lower funding costs?

Yes, I do. Not huge room to lower funding costs, but if we are in an environment where we don't make additional acquisitions -- and possibly even if we make additional acquisitions, I think we have room to continue to grind some additional basis points out of that cost of funds. What would derail that would be something really, really good.

And there are a few acquisitions, a few potential banks that are on the horizon out there, that, if we acquired them, the earning assets we would acquire would be substantially larger than what we would consider the core elements of their funding basis. So we would have to raise a lot of the deposits to support those acquisitions with our legacy deposit franchise, which we could easily do. Our franchise ought to be very capable of generating twice as many deposits, or almost twice as many deposits, as we currently have in it with this 112 office network we've got.

So we certainly have the capability to do that. But if I were going to be in a situation where I were going to raise $100 million, or $200 million, or $300 million fairly quickly, that would probably drive our cost of funds up a few basis points instead of letting us continue to take it down a few more basis points.

But if we made that kind of acquisition and added hundreds of millions of dollars of high-yield and covered loans, I don't think anybody would probably have any qualms at all about my deposit costs going up three or four basis points. It would be extremely profitable if we did that. Barring that sort of opportunity, though, I think our funding cost continues to work down by small margins.

Okay. And then on live bank deals, is the plan there to be more opportunistic in seeing what comes available within the now broader footprint that you have? Or do you have a more specific, sort of concentrated geographic target that you are looking at for live bank deals down the road?

We would be looking across our entire footprint, and the initial focus is just to get to know all of the banks that operate in those footprints -- which, of course, we're talking seven states. We're talking a lot of banks. To get to know them, and get to know their business, and become much better informed and educated about who might at some point in the future become into play.

We're talking a very long-term view of this, not a -- we didn't create a Director of M&A position with the idea we're going to do a transaction in Q3 or something. We want to create a position, and create a database, and an information base, and a contact base that will let us be a long-term player as strategic and profitable opportunities -- and I would emphasize profitable. We are going to apply the same sort of discipline in live bank acquisition, if we do it, that we've done in the failed bank acquisitions, and that is, do things that make money for shareholders. But we would be looking across our footprint.

Peyton Green, Sterne, Agee.

Good morning, George. A couple of questions. First, deposit growth was a little bit negative in the fourth quarter on a linked quarter basis. I was wondering if you could comment on that.

Well, you know, we are just continuing to do what we need to do to fund the balance sheet at the lowest possible cost of funds. So we continue to be right now in a mode of where we are heavily focused on growing non-interest-bearing checking accounts and non-CD accounts, which increased a little further in the quarter just ended. We ended the quarter at 68.81% of total deposits for non-CD, and that was up from 68.16%. So another 65 basis point improvement in the deposit mix toward non-CDs in the quarter just ended, on an end-of-period to end-of-period basis.

And apart from that, we are continuing to work down the cost of CDs, and that's working off the marginally highest cost CDs. And you -- when you're grinding away on that CD cost, you tend to lose a few of your more rate-sensitive customers, and that's okay. We are very happy with the funding position of the balance sheet.

As I said, we feel like we could reverse that and in very short order raise $100 million, $200 million, $300 million of deposits without much trouble. It just might take our -- instead of taking three or four basis points more out of our cost of funds, it might add three or four basis points to our cost of funds. But until I need the deposits, there is no reason to do that.

Okay. Then the second question is on the income statement, if we look at the accretion of loss share receivable income, other loss share income, and then the OREO gains, in 2011 the accretion was about $10.1 million. The other loss share income was $6.4 million, and the OREO gains were about $3.7 million.

If you look at those going into 2012 and your remediation efforts on those portfolios, what would you expect those line items to do directionally, and then some sense of magnitude?

Well, the accretion income, of course, is going to go down unless we make additional acquisitions, because as we collect the receivable every quarter from the FDIC and diminish the amount of receivable, the accretion is going to go down. So what I would -- we had $2.36 million of accretion income in Q4, and I would expect that number to diminish largely over a 30-month period -- about 2.5 year period. So roughly 10 quarters, probably, would -- if you sort of -- a good approximation of that, and of course part of it will drag out for nine more years, but for all practical purposes, if you sort of assumed that goes to zero over two to three years, 2.5 years, 10 quarters, that's probably a pretty good proxy for that.

Now, we'll get out here 10 quarters, and it will still be hundreds of thousands of dollars a quarter, but we'll be -- in the context of our overall financials, that won't be a big number. The gain on sale number I would expect to go up. The other loss share income number I would expect to go up for the next year or two. And the reason is the OREO. As I discussed in my prepared remarks, is conservatively accounted for. We are having more and more success, it seems like, selling that.

We've got several pretty good sized transactions that ought to close this quarter, and those transactions should generate gains. The other loss share income, the recovery income -- that number, I think, was $1.50 million in the quarter just ended and was down from $2.9 million, Greg is telling me, in the quarter just ended.

And it was down not because we didn't have as much recovery income about in Q4 as we did in Q3, but we did our annual true ups on, really, 2.5 of the banks. We did part of the true up work on Park Avenue, but we did the true up work on Oglethorpe and the Chastity acquisitions in Q4, and we ran those true up -- those annual first annual true up valuations through the current income, and they were debits, and they went through other loss share income. They were not material enough to carry back and recast prior quarters. And we just ran them through current income.

So that tended to diminish recovery income in the quarter just ended. And cut it by about $1 million -- Greg? -- $1.2 million or something pretax. So that number would've -- apart from those true up adjustments, that number would've been close or pretty close to probably where it was in Q3 -- in Q2. Or Q3.

So that number will, I think, tend to work its way back up. It will bounce around a lot, as I mentioned in my prepared remarks. Pre-payments will move it. But the gain on sale number and the other loss share income number were lower in Q4 then I expect them to be next year, and I think they will have a stable to upward trend versus 2011.

David Grayson, SunTrust Robinson Humphrey analysts.

Good morning George. I apologize. I tried to jump out of the queue. All of my questions have been answered. So thank you very much.

(Operator Instructions). Follow-up from David Bishop.

George, just a quick housekeeping follow-up on the salary employee benefits line; a little bit of a bump up there. Does that reflect any sort of end of the year bonus payments? And do we expect somewhat of a giveback like we saw last year in the first quarter?

Yes. There was an element of that in there. I think it was about between $600,000 and $700,000, Greg is telling me. And, to give you a headcount perspective, at September 30, we had 1102 FTEs, full-time equivalent employees. At December 31, that was down to 1083.5 FTEs, so somewhere around the Company here, there is a half an employee running around.

So a reduction of 18.5 FTEs over the course of the quarter. And that just reflects the fact that as we are -- as we completed the conversions on all of these offices, some of the operational staff are going away, and there are other things that are continuing to get rationalized on staffing issues and so forth, where we've got folks that we needed for a while, but we didn't need longer-term.

And I think you'll probably see -- as I said, I think our Q1 overhead expense in the aggregate will be less than Q4, continuing that trend that we saw, where we had a several million dollar reduction from Q2 to Q3, and another $2 million-plus reduction from Q3 to Q4.

I think you see, probably, a less significant -- and I don't think we can get $2 million out of it, but I think we will see a lower level of overhead expense in the first quarter than the fourth quarter. And certainly, we need to get those overhead numbers back into more appropriate levels, and Q1 will be much more of a normalized level than what you have seen in each of the quarters of 2011. Unless we make another acquisition, which we certainly hope to do, and if we do I think we will -- that would be positive enough experience that everybody would forgive me for not getting the overhead numbers back in line.

Would you happen to have the drag from foreclosed property expense during the fourth quarter compared to third quarter?

I don't have that number. I'm sorry. We'll have it in the annual report, and now I can give you -- Greg Scott right here, I can give you our write-down expense. The OREO write-down. I don't have all of the loan collection and repo expense items broken out, but, Greg, I say -- .

$650,000.

Yes, we had $650,000 in OREO write-down expense in Q4. And in Q3, was that $1 million -- what was that in Q3? $1.2 million? Do you have that number?

$1.3 million.

$1.3 million. So it was half in Q4 what it was in Q3. So that was obviously a meaningful item in the reduction -- a meaningful contributor to the reduction in non-interest expense from Q3 to Q4.

(Operator Instructions). Derek Hewett, Keefe, Bruyette & Woods.

I have a quick housekeeping question. Could you quickly provide some additional color on the charge-offs for this quarter and kind of what buckets you saw the most activity in?

I don't have a breakdown on that. We had a residential lot deal that had been limping along, and liquidating and selling lots. And the customer's other financial difficulties finally just overcame them, and we wrote that down and foreclosed on that, or are in the process of foreclosing on that.

The good news is he had a contract with a homebuilder to sell those homes, and we are continuing to work with that homebuilder. So as soon as we get that into OREO, which should happen very soon, those lot sales should resume, and that should liquidate out of OREO in an orderly manner.

So that transaction, I think, generated probably close to $1 million in loss, as we wrote that down to the net present value -- discounted net present value of future sales proceeds expected. And then we had a customer who we -- had a very large foreclosure -- or not a foreclosure, but a short sale on a very expensive house in a coastal market that had been originated in our Legacy Bank. And this guy was -- had a lot of liquidity and a lot of wealth when the transaction was done. He lost a lot of that and ended up having to sell the property and sold it at a substantial discount to his original cost on our loan. He came out of pocket with a large amount of cash, and we wrote off a large amount of that. And I think we had about $1.5 million loss on that transaction to liquidate that.

Those were the largest two components. So one would be in the single-family bucket, and one would be in the construction and development bucket. Those were -- those that was the biggest two pieces. The others were just odds and ends scattered around throughout the portfolio.

Blair Brantley, BB&T Capital Markets.

Just a quick housekeeping item as well. Do you have your updated criticized and classified loan levels? Or if you don't have those numbers, can you tell me where they went versus Q3 directionally?

Yes. They were directionally -- our classified loan levels were down about $10 million from September to December. There was a lot of movement up and down in those numbers. You know, different items got added, and different items got liquidated and removed. The net debt difference was largely attributable -- and the $10 million is pretty rough estimate -- but the difference was largely attributable to that one loan I previously discussed that got totally fixed, and paid up, and reserved for interest and tax reserves for the future, put up from customer's money and going forward.

So that was the largest swing, was that one item. There were a lot of additions and subtractions, as there are in every quarter.

And it appears we have no further questions at this time. Mr. Gleason, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you for participating in the call today. We appreciate it. We look forward to talking with you in about three months. Thank you, and have a great day. That concludes our call.

Again, that does conclude today's conference. Thank you for your participation.