Bank Ozk (OZK) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bank of the Ozarks third-quarter earnings conference call. As a reminder, today's call is being recorded. At this time, it is my pleasure to turn today's call over to Ms. Susan Blair. Please go ahead.

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 in understanding our recent operating results and future plans, goals, expectations, and outlook. To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates, and outlook for the future, including statements about 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, including our expectation for net interest income to increase in coming quarters; noninterest income, including service charge income, mortgage lending income, trust income, income from bank-owned life insurance, net FDIC loss share accretion income, other loss share income, and gains on sales of foreclosed assets, including foreclosed assets covered by FDIC loss share agreements; noninterest expense; our efficiency ratio; asset quality and our various asset quality ratios; our expectations for provision expense for loan and lease losses; net charge-offs and our net charge-off ratios for both noncovered loans and leases and covered loans; our allowance for loan and lease losses; loans, lease and deposit, growth including growth in our legacy loan and lease portfolio through 2014 and growth from unfunded closed loans; changes in the value and volume of our securities portfolio; possible purchases of additional bank-owned life insurance; the opening and relocating of banking offices; our plans for traditional mergers and acquisitions; our goal of making additional FDIC-assisted failed bank acquisitions; other opportunities to profitably deploy capital; and our positioning for future growth and profitability.

You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call. For a list of certain risks associated with our business, you should also refer to the Forward-Looking Information caption of the Management's Discussion and Analysis section of our periodic public reports, the Forward-Looking Statements caption of our most recent earnings release, and the description of certain risk factors contained in our most recent annual report on Form 10-K, all as filed with the SEC.

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

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

Good morning and thank you for joining today's call. We are very pleased to report our excellent third-quarter results. Net income for the quarter just ended was our third-best quarterly net income ever.

In each of the two prior quarters in which we reported higher net income, we benefited from two FDIC-assisted acquisitions with significant bargain purchase gains.

Highlights of the third quarter were numerous. Our net interest margin continued to be among the best in the industry and actually improved 13 basis points from the immediately preceding quarter. Noninterest income included record income from service charges on deposit accounts and excellent mortgage lending income.

We achieved good growth in noncovered loans and leases, giving us our fifth consecutive quarter of growth in noncovered loans and leases.

Several of our asset quality ratios improved to their best levels in over four years, while our third-quarter results were very good. We are even more pleased with how well positioned we are for future growth and profitability.

Let's look at some details. Net interest income is traditionally our largest source of revenue and is a function of both the volume of average earning assets and net interest margin, both of which increased in the quarter just ended. This combination helped us achieve a $2.1 million or 5.1% increase in our third-quarter net interest income compared to this year's second quarter.

As a result of our growth in noncovered loans and leases during the third quarter, earning assets increased to a quarter-end total of $3.117 billion at September 30, 2012, which was higher than the average balance of earning assets for the third quarter as a whole.

Our noncovered loans and leases grew $51 million during the third quarter of 2012. That's a solid result for the quarter. But our loan and lease teams did an even better job than that number reflects.

During the quarter just ended, our unfunded balance of closed loans increased another $143 million to a record total $697 million.

Because we're getting so much cash equity in so many of our loans, our growth in outstanding loan balances in 2012 has been a little slower than we expected. However, this $697 million unfunded balance of closed loans, coupled with the excellent pipeline of loan requests on which we are currently working, suggests to us that we will achieve our goal of a minimum of $360 million of net growth in noncovered loans and leases in 2013 and a minimum of $480 million in 2014.

We are reiterating our prior loan growth guidance for 2013 and 2014. We also expect further growth in noncovered loans and leases in the current quarter, most likely in about the same volume range as our third quarter's growth of $51 million. Of course, this guidance for both future years and the fourth quarter of this year excludes any growth in loans and leases from our recently announced acquisition or possible future acquisitions.

Despite the highly competitive markets in which we are operating, we find -- we are finding many opportunities for good-quality, good-yielding loans. Because our landing teams are maintaining such excellent pricing and credit discipline and getting so much cash equity in our new loans, I believe that the loans we have originated in recent quarters are among the highest-quality loans we have originated in my 33-plus years as CEO.

In regard to net interest margin, in our January conference call we stated that we expected our net interest margin would fluctuate over the course of 2012 in a range from 6.05% to 5.80%. Our net interest margin was 5.98% for the first quarter, 5.84% for the second quarter, and 5.97% for the third quarter, all well within our guidance range.

In our last call, we suggested that our third-quarter net interest margin might likely improve from the second-quarter level. 13-basis-point improvement we achieved was better than we expected and is primarily due to the increased yields on covered loans. We continue to believe that the 6.05% to 5.80% guidance range is appropriate for the remaining quarter of this year.

We're still working on projections and budgets for next year, and we expect to provide 2013 net interest margin guidance in our next quarterly earnings call.

Our 5.97% net interest margin is truly among the best the industry and is the result of a team effort. In the quarter just ended, our deposit team reduced our average cost of interest-bearing deposits from the second quarter to the third quarter by 6 basis points to 0.33%. Further improvement in our average cost of interest-bearing deposits, if any, is expected to be modest as we increase our focus on growing deposits to fund expected loan growth.

On the other side of the balance sheet, our lending and leasing teams have continued to achieve good pricing. In the quarter just ended, our yield on noncovered loans and leases was 5.86%, giving us a very enviable 5.53% spread between our yield on noncovered loans and leases and our average cost of interest-bearing deposits.

Let's shift to noninterest income. Income from deposit account service charges is traditionally our largest source of noninterest income. Service charge income for the quarter just ended was a record $5.0 million and increased 5.6% compared to the third quarter of last year. Service charge income for the first nine months of this year increased 11% compared to the first nine months of 2011.

Our growth in core deposit customers has had and should continue to have favorable implications for income from deposit accounts service charges.

Mortgage lending income in the quarter just ended increased 105% from third quarter of last year. Mortgage lending income for the first nine months of this year increased 93% compared to the first nine months of 2011.

A number of our markets have seen an increased volume of home purchase activity, and we have continued to build our mortgage lending team. Both of these factors have contributed to our excellent results.

Trust income in the quarter just ended increased 6.8% from the third quarter of last year. Trust income for the first nine months of this year increased 5.5% compared to the first nine months of 2011.

At June 30, 2012, our balance of bank-owned life insurance, or BOLI, was $63.2 million. In the last two weeks of the third quarter, we completed the purchase of an additional $30 million of BOLI, resulting in a balance of $93.8 million at September 30, 2012. Income from this additional BOLI purchase will help defray increasing costs associated with converting the Company's existing 401(k) retirement savings plan to a safe harbor 401(k) plan and other growth in the cost of employee benefits.

As a result of the timing of this BOLI purchase, the additional BOLI contributed very little to third-quarter noninterest income. Based on the BOLI purchases in the quarter just ended, BOLI income from accretion of cash surrender value is expected to increase from $598,000 in the quarter just ended to approximately $860,000 in the fourth quarter. In addition, we are currently evaluating the possibility of some additional BOLI purchases.

Net gains from sales of other assets were $1.43 million the quarter just ended compared to $1.73 million in last year's third quarter. Net gains from sales of other assets were $4 million -- $4.38 million in the first nine months of this year compared to $2.84 million in the first nine months of 2011.

The net gains on sales of other assets in each of these periods mentioned were primarily attributable to gains on sales of foreclosed assets covered by loss share agreements, which we refer to as covered OREO. When we acquire such foreclosed assets and FDIC-assisted acquisitions, we mark those assets to estimated recovery values, and then we discount those estimated recovery values to a net present value, utilizing an appropriate discount rate.

Unlike covert loans, the net present value discount on our covered OREO is not accreted in income over the expected holding period of the covered OREO. Because of this, we are very likely to see net gains from sales of covered OREO for some time to come, and this has certainly been evident in each of the last nine quarters.

As part of our FDIC-assisted acquisitions, we record a receivable from the FDIC based on expected future loss share payments, and we record a 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 net discount amounts are then accreted into income over the relevant time periods. And in the quarter just ended, the resulting net accretion income was $1.70 million, down from $2.04 million in the immediately preceding quarter.

This accretion income should be an ongoing source for us as long as we are under the loss share agreements. Of course, the amount of net accretion income will diminish over time as loss share winds down. And you can see this trend over the last six quarters.

In addition, noninterest income in the quarter just ended included other loss share income of $2.27 million. This line item includes certain miscellaneous debits and credits related to the accounting for loss share assets, but consists primarily of income recognized when we collect more money from covered loans than we expected we would collect. We refer to this additional sum as recovery income.

Since we tend to be conservative in the way we value covered assets, which is appropriate, given the uncertainty surrounding many of those assets, it is likely that this other loss share income will continue to be a meaningful income item for many quarters to come. Because it can be significantly impacted by prepayments of covered loans, other loss share income will tend to vary from quarter to quarter.

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

First, the 8.95% effective yield on covered loans in the quarter just ended reflects the substantial discount rates we utilize to determine the net present value of covered loans.

Second, the significant agreement accretion income from our FDIC loss share receivable reflects the 5% discount rate we utilize to discount those assets to net present value. Some banks have used discount rates as low as 2%.

Third, our other loss share income, primarily recovery income, as we've previously discussed, reflects the fact that our lending and special assets personnel have done a great job so far in maximizing recoveries on 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.

You will note from our press release that we had $1.7 million of provision expense in the quarter just ended for covered loans. Obviously, that number reflects covered loans where we were not conservative enough in our initial estimates of cash flows. However, if you consider that number in the context of our $1.4 million in gains on sales of assets, mostly covered OREO, during the quarter, and our $2.3 million of other loss share income during the quarter, mostly recovery income, you can see the overall conservatism with which we have valued these acquired portfolios.

We continue to be very pleased with the current performance and future prospects of our seven FDIC-assisted acquisitions. We are continuing to actively pursue additional FDIC-assisted acquisitions. And we continue to maintain our discipline in pricing and our goals for profitability, both in the short term and the long term, for these transactions.

Given the pricing discipline we are maintaining, it is hard to handicap our prospects for making additional FDIC-assisted acquisitions, but we remain optimistic. If, however, we don't make additional FDIC-assisted acquisitions, we believe that our organic loan growth will be sufficient to support positive earnings momentum.

We are beginning to achieve the loan growth momentum needed for a post-FDIC-assisted acquisition environment, as evidenced by both our second- and third-quarter results. Of course, loan growth from possible future FDIC-assisted acquisitions or traditional mergers and acquisitions would be icing on the cake.

Let's turn to noninterest expense. We've said for several quarters that we expected our noninterest expense to return to a more normal level as our newly acquired offices begin to perform more like our legacy offices. There may be some room to decrease noninterest expense from the level achieved in the quarter just ended, but as we said in last quarter's conference call, we believe that the more significant goal now is to improve our efficiency ratio by growing our balance sheet and thereby increasing revenue significantly while maintaining noninterest expense at or near the level of the last few quarters.

This guidance does not take into account the effect of our pending acquisition, which will add additional noninterest expense, or the effect of any possible future acquisitions, either FDIC-assisted or via traditional M&A, which would also increase noninterest expense.

We are continuing to grow and expand. As previously reported, in January we opened an expansion office in Austin, Texas, for our real estate specialties group. In February, we opened our ninth metro Dallas office in The Colony, Texas. In July, we opened our 10th metro Dallas office in South Lake, Texas, as well as an expansion office in Atlanta, Georgia, for our real estate specialties group.

In August, we relocated from a leased facility to a new owned facility in Bluffton, South Carolina. And in September, we opened our second office in Mobile, Alabama.

In the fourth quarter, we expect to relocate our Wilmington, North Carolina, office and our original office in Mobile, Alabama, both from leased facilities to new owned facilities. In early 2013, we plan to relocate our longtime Charlotte, North Carolina, loan production office to a new full-service banking office we are building in Charlotte.

These new offices reflects both the growing importance of Texas to our Company and our shifting to a more offensive-minded business strategy in our Southeast markets. This offensive focus in the Southeast is also evident in the recent addition of two veteran loan officers in Wilmington, North Carolina; one veteran loan officer in Bluffton, South Carolina; and one in Mobile, Alabama.

Last week, we announced that we had entered into an agreement to acquire all of the outstanding common stock of Genala Banc, Inc., in a transaction valued at approximately $27.3 million. As we stated in our announcement for this transaction, following closing, the transaction expected to be accretive to book value per share, tangible book value per share, and diluted earnings per common share.

Genala Banc, Inc., is the holding company for The Citizens Bank, which operates one banking office in Geneva, Alabama. As of June 30, 2012, The Citizens Bank had approximately $170 million in total assets, $45 million of loans, and $142 million of deposits.

The Citizens Bank, which opened in Geneva in 1901, is a healthy bank with a long and great history and a solid market share in Southeastern Alabama. This acquisition provides an opportunity to expand our already-substantial presence in the Southeast and provides a nice link between our two offices in Mobile, Alabama, and our two offices in, Bainbridge, Georgia.

The transaction is expected to close in late December 2012 or during the first quarter of 2013. Completion of the transaction is of course subject to certain closing conditions, including customary regulatory approvals and the approval of the shareholders of Genala Banc, Inc.

One of our long-standing and key goals has been to maintain good asset quality. Economic conditions in recent years have made our traditional focus on credit quality even more important. The strength of our credit culture and the depth of our commitment to asset quality are both evident in the further improvement in some of our key asset quality ratios in the quarter just ended.

At September 30, 2012, excluding covered loans, our ratio of nonperforming loans and leases to total loans and leases was 0.44%, which is a 6-basis-point improvement from June 30 this year and a 26-basis-point improvement from year end. This was our best ratio of nonperforming loans and leases since the fourth quarter of 2007.

Our September 30, 2012, excluding covered loans and foreclosed assets, our ratio of nonperforming assets as a percent of total assets was 0.59%, which is a 4-basis-point improvement from June 30 of this year and a 58-basis-point improvement from year end. This was our best ratio of nonperforming assets since the second quarter of 2008.

Similarly, excluding covered loans, our ratio of loans and leases past-due 30 days or more, including past-due nonaccrual loans and leases, was 0.62% at September 30, 2012, which is a 13-basis-point improvement from June 30 of this year and a 94-basis-point improvement from year end. This was our best past-due ratio since the third quarter of 2007.

In recent years, we've accumulated a sizable war chest of capital through retained earnings. Our excellent earnings and resulting capital growth continued in this year's third quarter, pushing our ratio of common equity to assets up to 12.50% and our ratio of tangible common equity to tangible assets to 12.25%.

We believe that we will have numerous opportunities over the next several years to profitably deploy the accumulated capital, and that the most immediate capital deployment opportunity we foresee continues to be growth in our legacy loan and lease portfolio. The second most immediate opportunity for capital deployment is additional FDIC-assisted acquisitions. A third opportunity relates to traditional M&A activity, an area on which we have recently increased our focus. And the fourth opportunity will likely come whenever interest rates increase significantly and we consider it timely to reload our investment securities portfolio.

In closing, we feel that the quarter just ended was an excellent quarter, with its net income of $19.3 million. Our goal, which we believe is a reasonable goal, is to improve on our third-quarter earnings in the fourth quarter of 2012 and in each succeeding quarter of the coming year.

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

(Operator instructions). Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. George, just wondering what you're seeing on the M&A front in terms of regular-way deals. Obviously, you just announced a small deal in Alabama. Just wondering what you're seeing in terms of a pipeline and if you have any specific focused interest either geographically or otherwise.

Okay, yes, we've been very active in that arena since early in the year with the creation of a new position of Director of Mergers and Acquisitions, which is Dennis James' position. Dennis has been out, very actively involved in a number of markets, meeting bankers, meeting investment bankers, and looking at a number of opportunities.

I would say we've looked at something probably in the teens in number of transactions so far. Dennis is assisted in that by various personnel in our corporate finance staff who are running numbers and helping him do analysis and models on that.

So we've been very active. The Genala Banc is the first agreement that we've gotten signed. We are actively looking at other opportunities on an ongoing basis and expect to continue to do so. So we think it will be a meaningful area of opportunity for us in future years.

Obviously, there are too many banks in the country, and there are a lot of banks who -- particularly smaller banks under growing regulatory burden and profitability challenges in this low rate environment are looking for a good partner to join up with. So we think there will be numerous opportunities there.

And we like the transaction that we've got signed up as our first transaction. It's small, but it's a very nice little bank that's a high quality bank with a really good market share. So we are very positive about that.

In regard to geographic focus, we are looking primarily in the same footprint that we are looking for FDIC-assisted acquisitions primarily. And the first focus there is really the seven states in which we are already operating -- Arkansas, Texas, Georgia, North Carolina, South Carolina, Alabama, and Florida.

We are also secondarily looking in the five other states that have been the other part of our main focus of FDIC-assisted acquisitions -- Tennessee, Virginia, Kansas, Missouri, Oklahoma. And we would look at acquisition opportunities outside of those seven and those five, those 12 states combined. But most likely, any traditional M&A activity we do is going to be focused in those 12 states, and primarily in the seven states where we already operate.

The deal in Alabama was very small. Is there a cap on how large a deal you would be willing to do at this point? Or is it just a case-by-case basis?

It's purely a case-by-case basis and going to be driven by our ability to generate return on equity in the transaction. You know, with the capital position that we've got right now, we could make $2.460 billion of acquisitions and still have a bank-level Tier 1 leverage ratio of 8% or more.

So we have tremendous capacity to add to our balance sheet. And we're looking at transactions of all sizes, and we'll go where the opportunities are. If the transactions are small and they generate our target return on investment and are a meaningful addition to our franchise, we will be glad to score runs by doing a lot of singles. If we can do larger transactions that -- since we are in playoff season for baseball -- will be doubles or triples or homers, we would be glad to do those as well. But we are really driven by the economics of each transaction, not the size.

And one last question on that. Are you more inclined to look at relatively healthier institutions, or are you willing to look at pretty distressed opportunities closer to the FDIC-type transaction?

We are looking across the entire spectrum of institutions, both size-wise and condition-wise. This bank we've got under contract now in Alabama is a very healthy bank, obviously. But we are looking at banks that are near the edge of being FDIC opportunities that would be much less costly acquisitions. And you just have to do the math on them. And again, we're driven by return on equity, is our goal in these transactions.

Thank you very much for the detail.

Dave Bishop, Stifel Nicolaus.

Just curious in terms of the loan growth, some of the tenor there. Assuming a decent amount continues to come from the real estate specialty group, I was wondering if you could maybe just give us some color there in terms of maybe some of the breakdown in terms of the growth and how the portfolio shaked out in terms of quarter end?

Yes, the growth in the quarter included a few shifts. We were up very slightly in our residential 1-to-4 portfolio, just a fraction of a percent. Our CRE portfolio, we had about $8 million of growth there, but it actually declined in percentage terms about 0.6%.

Our construction and development portfolio was up about $45 million. That was a 1.6% growth. Construction and development now includes about 28% of the total portfolio, up from 26.4% at June 30. Modest decline in agri. We were down about $10 million in multifamily; that went from 5.8% to 5.2% of the portfolio, and then some other negligible changes.

So I guess the real story for the quarter is construction and development went up, and multifamily went down a little bit, and CRE was up a few million dollars, $8 million, but down in percentage terms. So not a ton of change, and nothing surprising there, given our prior disclosures regarding the unfunded balances that we had outstanding at June 30, which of course is largely construction and development loans.

The state of originating office shifted a little bit. Actually, Texas, in kind of a statistical anomaly, went down a little bit, from 43.47% to 43.14% of the total. North Carolina went up 20 basis points to 3.99% of the total. Arkansas was down 102 basis points to 51.01%. And Georgia was actually up 116 basis points, and Georgia and now accounts for 1.78% of our nonloss share loans. And that's consistent with the comments I made about beginning to have a more offensive-minded focus in the Southeast.

We are seeing some improvement in some of those markets. And as our lenders in those markets get less tied up in dealing with the resolution on some of the loss share loans, they are having more time to go out and seek new opportunities and look for new opportunities. That shift in their mix of their allocation of their time, combined with the July opening of our real estate specialties group office in Atlanta, has contributed to some positive growth in our Georgia markets.

Great. Thanks for the color, George.

Matt Olney, Stephens.

I also want to circle back on loan growth, from Dave's question. But I wanted to ask more about the -- what appears to be kind of a lumpiness factor. It was pretty soft in the first quarter. It accelerated in 2Q, and it kind of found a middle ground in 3Q. Has this lumpiness been within your expectation, and will this continue in 2013, do you think?

Yes, it has. And that's why we gave -- we've given our guidance in -- when we've given it in quarterly terms, we've always said it would be an average quarterly results for the year, because we did expect some lumpiness in that number. And yes, I think that continues.

You know, this $697 million of unfunded loan commitments we've got is -- that's a big number, obviously, and that's a big pool of loans that are closed, that are already on the books, that the funding is just waiting for the customers to put in their equity.

And of course, those projects are underway, so they are contributing their equity. But to give you a little more color, and I'll do this, and I'm going to round these numbers off to the nearest million dollars, but in 2013, if we project out all of the fundings that we expect on our closed loans just for real estate specialties group, which is about half of our portfolio and probably something on the order of 80%, I would guess, 75%, 80% of our unfunded commitments are real estate specialties group. But if we project out that and project out all the repayments on loans and what we think will be the normal cycle for payoffs of loans that get booked, developed, stabilized, and go secondary market or insurance companies or something, the real estate specialties group alone has first-quarter 2013 fundings of just under -- fractionally under $70 million net fundings, just under $80 million in the second quarter, just over $91 million in the third quarter of next year, and just over $84 million in the fourth quarter of next year.

So, if you add that up, I think that is $325 million, if I added it up in my head correctly. I may be off. But -- so that unit alone has loans either on the books that are closed or loans that are approved by a loan committee that are in the closing process. And the net of the fundings up on those, less what is expected to pay down and pay off next year from their portfolio, should generate about $325 million of growth from that portfolio.

Now, obviously, we hope they're going to get a lot more loans that get approved in the coming quarter that will fund next year, and even more will come in 2013 in addition to that. The flipside of that is they will have some things pay off, for one reason or another, that they didn't anticipate for projecting this payoff schedule.

But we are very optimistic about our 2013 loan growth numbers because we've basically -- and we've got, of course, other offices that have closed loans that are not yet funded that are 20% or 25% of our balance and have approved loans that are in the pipeline working toward closing. So the specific data I'm giving you is just for real estate specialties group, which is the biggest piece, but certainly not the only piece of our growth story going forward.

So we are very positive and very optimistic about our minimum $360 million of growth next year. And given what's in the pipeline now that would have fundings dragging out way into 2014 as well, we think that 2014 is a very achievable number as well.

This year, because we've had, certainly, the volumes we expected this year of closings, it's just been that the way the transactions have been structured with so much cash equity, we've just not gotten the funding as fast as we thought we would this year.

You know, in January this year, we said we thought we'd have $240 million of growth in noncovered loans. I've got to have a $92 million quarter in Q4 to get that. That's probably unlikely. I mean, it's possible I could -- if everything we've got that looks really promising gets closed and all, we could hit that number. But more likely, Q4 is going to look a little bit like Q3, I think, you know, $51 million plus or minus type number.

But with that growing volume of unfunded loans, we are very optimistic, very positive about our ability to achieve a minimum of $360 million of growth next year, and I actually think we should do much better than that. So we'll see how it plays out.

George, that's helpful. And just to clarify, those numbers you gave per quarter for next year, those included all the real estate offices, not just Dallas, is that right?

Dallas. That's just Dallas. That's real estate specialties group.

But does that include the offices in Austin and Georgia?

Yes, I'm sorry. Yes, that's for the whole real estate specialties group. That includes Austin and Atlanta.

Okay. And then secondly, I also wanted to ask on the margin, I know you don't want to get into guidance in 2013, but I was hoping you could just kind of discuss some of the drivers there, because it feels like there is a meaningful downward bias, at least compared to 2012, just because the strategic runoff of covered loans are higher-yielding in 2013. Is that a fair statement, or is there anything else we should consider that could offset some of that in 2013?

No, I think that's a reasonable statement. Certainly the new loans we're booking do not yield as much as the covered loans that are running off. So, given that, there is -- it is a downward bias, and -- to that number. And that's why in January of this year, when we gave our guidance for the year, we said 6.05% to 5.80%. We put the guidance in a descending order, because we think that's the kind of environment we're in.

You know, I'm very pleased that it looks like we're going to hold that margin well within that range. So we're going to be starting 2013 at a better point, probably, than most of our analysts probably predicted we would be ending 2012. So I think that's a positive, but, yes, I think there is a downward pressure as covered loans roll off. I can't replace 8.90% yields, even if we went crazy and bought Italian and Spanish bonds.

So, I don't know how to replicate those yields, but I am pleased with the relatively good yields we're getting versus what it seems a lot of our competitors are getting on the quality loans that we're putting on our books.

I made note in my prepared remarks that the spread between our legacy noncovered loans and our cost of interest-bearing deposits in the quarter just ended was 5.53%. So we are maintaining a really good core margin, and we continue to be very focused on maintaining that margin.

Thank you, George.

Kevin Reynolds, Wunderlich Securities.

A couple of questions. One, I think, as you may have addressed it and I just didn't keep up with you, on expenses, up $1.4 million sequentially, and it looks like occupancy and other were up about $0.5 million apiece. I know you were talking about converting some branches and all. Is that what was driving it in this quarter, or were you sort of letting us know that expenses going forward would be impacted by those events?

Well, what I said in my prepared remarks is that our goal was to grow our balance sheet and grow revenue while maintaining noninterest expenses at or near the level we have achieved over the last several quarters. And, you know, the third-quarter noninterest expense level, I think, was just about the same, within $100,000 of the first-quarter noninterest expense level this year, obviously up from Q2, when we had a lower number.

We've got a lot of things that contributed to those higher expenses in Q3 versus Q2. Some of them are ongoing. Some of them are kind of, you know, just normal ebbs and flows in those numbers.

I don't think we're going to be able to get back probably in Q4 anywhere near the Q2 level. I'm hopeful that Q4 is going to come in somewhere pretty close around to the Q3 level. We may be able to come in under the Q3 level. I think that's a plausible scenario. And we're working hard to do that.

We've got a lot of things going on. We've really launched a whole bunch of initiatives this year. I think our IS guys told me that they are working on 52 different ongoing projects to upgrade our IT infrastructure and speed and efficiency of our systems, security of our systems, telecommunication enhancements and so forth.

So, we are spending some money on those. Some of that is capital expenditures, but a lot of it is personnel and consultant costs and so forth. And that tended to increase operating expenses to a pretty high level in Q3.

We are really pushing hard to bring to a head a lot of the more problematic assets that we have acquired in these loss share transactions. That is accelerating some loan collection and repo expense, that hopefully we'll see a declining trend in that in 2013 and 2014.

We had extremely record warm weather in a lot of our markets, and our utility costs were a couple hundred thousand dollars higher than we would've normally expected, as a result of just weather and so forth.

So there were a lot of moving parts. There was a lot of things going on there. Obviously, we are continuing to be actively involved in due diligence with a lot of banks. I'll mention to you that the way we are paying our investment bankers is on an hourly basis and not on a success fee basis as we are looking at opportunities. So I'm paying fees on bills we're not doing where sometimes we may be engaging investment bankers. But I've always thought it was a bad policy to incent lenders to make loans, and I think it's a bad policy, for the same reasons, to incent investment bankers to advise (technical difficulty) that they get paid if you do a deal. I'm looking for a little more unbiased, objective advice from investment bankers than they might be able to give if they eat if they do a deal and they go hungry if they don't.

So, we've spent higher sums than I expected we would spend on consulting fees and expenses related to looking at acquisitions and so forth. And that will vary from quarter to quarter, depending on what we are looking at.

Okay. Just a couple of other questions that are, I guess, a little bit more conceptual. When you talk about the capital that you've built up over the last several years, it's now, I think you said 12.25% TCE ratio. Even with the loan growth that you've had and with acquisitions, you're still building capital faster than you can deploy it at this point. And it seems that that ratio might keep building, even with the targets that you have for 2013 and 2014.

What do you plan on doing with the capital as you build it? Because, obviously, if that number continues to -- if that ratio continues to rise, it becomes harder and harder for you to achieve the rates of return on that capital in each successive quarter. Might you have a higher dividend payout at some point, or do you think that there's going to be a pickup in M&A activity that will help you to deploy that capital?

Kevin, that's a great question. And I don't know that I can really answer that. M&A activity is certainly an opportunity. FDIC-assisted acquisitions are certainly an opportunity. And it's very difficult to handicap the timing, the magnitude of transactions or the existence of those.

When we -- before we started doing FDIC deals, we were talking about doing FDIC deals. We ended up doing seven so far. And before we did the first one, it was impossible to know if we were going to do one or 10. You just couldn't know.

And the same thing is true now. It's impossible to know how many additional FDIC deals we'll get, how many traditional M&A deals we'll get. I do have an optimistic view on both those fronts, FDIC acquisitions and traditional M&A. We're very actively engaged in looking -- seeking opportunities in both.

And my most earnest hope is that we'll have loan growth that will come in ahead of our guidance, that we'll utilize more capital. And, obviously, from the detail I gave earlier regarding just the real estate specialties group projected pipeline for 2013, it seems very plausible that, if we can keep the momentum that we've got going right now, that we could exceed those growth guidelines in a meaningful way in 2013 and 2014.

And I'm spending a tremendous amount of my time and energy talking with lenders, pressing them to pursue high-quality opportunities in their market, and get growth at a high level with high quality, with good margins. That has become one of the most significant focuses of my time in recent months and will continue to be.

So I'm hopeful, as I said in the call, that we will find meaningful ways to deploy that capital in a high-ROE-type scenario. And as I said in the last couple of calls, to me the most important thing is not how quickly we deploy that surplus capital, but how profitably we deploy it. And we're going to maintain our discipline about doing that.

Okay. And then I guess the last question I want to ask, and I think it was your discussion with Matt just a second ago, I know that the net interest margin is the result and not the driver. But when you talked about there being downward -- and expectations there was a downward bias on the NIM in 2013 and 2014 with covered loan runoff, how would you expect to offset that going forward? That's downward bias with your existing goals and for loan originations I think is the way I interpreted it.

How would you offset that? Would it be with sort of improvement in the efficiency ratio as those loans pay off and special assets folks get repurposed in the organization?

Well, certainly that is a potential cost savings, to eliminate loan collection and repo expense. And if we don't make additional FDIC-assisted acquisitions, then there are people working on those transactions now that will fill other growth roles in the future of our Company. And there are special assets people now who became special assets people because they were needed to be special assets people that will go back into a more offensive mode.

So I think really the key to offsetting some margin compression is to be more efficient. You know, the key there is, we've got 116 offices. We could be a $6 billion or $7 billion or $8 billion bank with that number of offices. We've just got tremendous capacity for growth within our existing office network.

So say we get to $7 billion in assets through growth over whatever period of time that is, and say our number of offices grow from 116 to 125 or something over that period of time. Assuming that's several years out, and you're running a $7 billion bank with 125 offices versus, say, $3.8 billion or whatever we are with 116 offices, clearly there's massive efficiency improvements that come from that evolution of your Company.

So, yes, we think efficiency is a very important part of our future growth story. Not that we're going to cut costs, but we're going to achieve substantial growth with just very minimal additions of variable costs as we grow.

Okay. That's helpful. Thanks, George.

Michael Rose, Raymond James.

Hey, just wanted to get a sense on -- you spent a little time talking about the mortgage income and people you've hired. Can you give us a sense for kind of the sustainability for mortgage banking income near these levels for at least the next couple quarters? Is that kind of what your thought process is?

You know, I've always said, well, I can predict mortgage income for about four weeks. And my ability to predict beyond that is fairly limited. But I will comment that we added a lending team down in South Lake, Texas. We're adding mortgage lenders in other markets. We're having discussions with other individual lenders and teams of lenders now that might join our mortgage operation in future quarters. So we are hopeful in regard to that.

We're in, of course, an environment where rates are near or at historic lows, multi-decade lows. So we are seeing a fair amount of refinance activity so far this year. 60% of our total volume in mortgage has been refinance volume. That number was 61% in the quarter just ended.

At the same time, the volume of activity we've seen from home purchases has grown. In the first quarter, we originated a little over $16 million of mortgage loans for home purchases. In the second quarter, that number jumped to almost -- well, a little over $27 million. And in the third quarter, that number jumped to almost $30 million.

So we've seen a positive trend in home purchase activity, as well as a continued high level of refinance activity. We are adding staff. The housing markets, particularly in Arkansas, Texas, and Charlotte, seem to be getting quite a bit better. So we are optimistic that we'll see continued growth in purchase activity.

We'll have continued addition of staff members. And with rates staying low for an extended period of time, we'll have a continued good refi market.

So we're optimistic about our prospects in mortgages, for a number of reasons. But at the same time, from observing the mortgage business and being in the mortgage business for a long, long time, I can tell you there's just not a lot of visibility very far out, because it just doesn't take a lot to move that volume of business one way or the other.

I appreciate the color. And then, if I could just go back to the margin, I think your comments were downward bias in 2013. Is that inclusive or exclusive of the most recent acquisition? If I'm doing my math right, it looks like it's about a 12-basis-point drag when you layer them in.

Yes. It's going to be hard for us to do any acquisition that's not going to erode our margin a little bit, because we've got a really, really good margin that -- it's very unlikely we're going to buy a bank that has a better margin than we do, just because there aren't many.

So, yes, that guidance does allow for the fact that, yes, we'll have some margin attrition, assuming this transaction closes, from the transaction. But it will be additive to earnings in other ways, and it will be accretive -- even with the dilution of the margin, will be accretive, we believe, to earnings per share in 2013 and 2014. And for years to come, it looks pretty consistently accretive, the way we've projected.

Great. Thanks for the color.

Derek Hewett, Keefe, Bruyette & Woods.

George, could you talk about the uncovered loan yields, which improved 8 basis points when most bank loan yields are heading in the opposite direction? Is this sustainable? And maybe what's the average loan yield that you are putting on on more recent deals?

Derek, I don't have an average, obviously. That number blended up. You know, I mentioned in the July call that some of the normal ebbs and flows of prepayments and payoffs and accounting adjustments and various things tended to dink our second-quarter net interest margin a little bit, and that I thought we would more likely be a few basis points higher on margin in Q3 than we were in Q2.

And some of those things that sort of dinked our margin in Q2 a little bit just went the other way and normalized in Q3. I would say that the Q3 interest rates on noncovered loans, I would consider that to be a fairly normalized interest rate for the quarter. There were not negative or positive things in that that I'm aware of or focused on that tended to cause it to be up or down. And Greg is nodding affirmatively over there, too, that he's not aware of anything.

So I think that is a good number for your starting point. Now, you can project what you want to project going forward, where you think that goes. But I think the 3Q number is a good starting point, and is a good starting point, frankly, for the noncovered -- or the loss share loans as well.

So, I would use Q3 as your starting point and kind of work from there as to where you think it does. Obviously, we are pleased with the fact that we've got a 5.53% what I would refer to as core margin, you know, spread between our legacy non-loss-share loans and our cost of interest-bearing deposits.

So we think that spread is very healthy, and we're going to fight to maintain that spread, as I said earlier, at the highest level we can. Will there be some attrition on that spread? Probably. If we stay in this kind of rate environment over time, yes, that spread probably gives up a little bit. I don't think it's a lot. And you get a little attrition in the margin from the shift from loss share loans to non-loss-share loans.

But starting out with a core spread of 5.53% is not terribly far from that 5.97% margin number. And so we are pretty optimistic that our margin is going to hold up at a really good level, both in absolute terms and relative to the industry, for a long time to come.

Okay, great. Thank you very much.

Jeff Bernstein, AH Lisanti.

So I hate to be redundant, but just on construction loans in particular, kind of order of magnitude, what kind of rates are you getting on those loans now?

Well, it varies, depending on the type of product and the market in which it is, the size of it, the degree of -- it just varies so much from transaction to transaction that I don't know that I can actually give you meaningful guidance. It's all over the board, depending on the type and structure of each transaction.

As Derek noted, our yield on our noncovered loans was actually up last quarter. I've addressed that. I think that yield is certainly reflective of the type of loan book we have. It's a reasonable indicator of where that book is yielding.

The average yield, that 5 -- what is it, Greg? 5.86% I think, whatever that number is -- 5.86%. The yields on new loans we are putting on is less than 5.86%. I'm fairly confident in saying that. But it's not -- we're getting a lot of loans booked in the 5s, with 5 handles on them, and some with 6 handles on them, although I would say 5 is the predominant handle, whether it's 5.25%, 5.5%, or 5.75%, or 5.95%. And we're doing loans that also have 4 handles on them in certain situations for extremely favorable transactions. So, it's all over the board, and predominant yields are somewhere in the 5s.

And just a quick follow-up. Are there points associated with those loans? My guess is that those are paid at closing. And excuse my ignorance, but how do those come into the P&L?

We get fees on almost all loans. And all fees that we take are deferred and recognized as a yield adjustment over the life of the loan.

Great, thank you.

Blair Brantley, BB&T Capital Markets.

Just a quick question. George, it appears that the covered loan runoff, the pace of that picked up a little bit this quarter. Is that just kind of a one-off, or is that kind of the pace, you think, going forward?

Blair, that is a really good question. We had -- July was probably right in line with our expectations, and September was probably right in line with our expectations. The magnitude of paydowns in the month of August was almost twice, not quite twice what we would've expected for the month.

So I have been through that we had more transactions pay off, pay down, and resolve in August than I would've expected. And, honestly, I really can't add a lot of intelligent comment beyond that. I don't know whether that is a one-month phenomenon that just occurred in that one month; it was not evident in July and September, obviously. I don't know whether we end up with a similar pattern in future quarters, where we have two months that are in line with expectations and then one accelerated paydown, or that actually could go the other way.

So many of these loss share loans that are not going to end up blowing up and defaulting and being liquidated that are getting repaired and rehabilitated, a lot of those loans are going to end up staying on our books longer than we would have -- than you would anticipate if you were just projecting, gosh, a five-year runoff or a four-year runoff or whatever of the whole portfolio.

A lot of those are going to stay on the books for a long period of time. So at some point, and I really can't tell you when this is going to occur because I just don't know how it's going to play out, but at some point, the runoff rates from the portfolios are going to slow dramatically because we are going to get down to a point where we've liquidated all the junk that has to be resolved and foreclosed and liquidated out, and there is a residual amount of remaining loans that were either good loans from the get-go or have become good loans by the customers improving the performance, paying the loan down, pledging additional collateral, whatever, and those loans become ongoing pieces of our book.

So, I think we may see a combination of three scenarios going forward quarter to quarter. We may see a quarter like we did last quarter, where we have a month that has unusual paydowns and it appears that it speeds up. Then we may have quarters that look very normal, consistent with our sort of expectations. And then we may reach a point in time in the future where the runoffs begin to diminish noticeably and the volume stays on the books longer because these loans that are still there are getting fixed and are of good quality.

Okay. Thank you very much.

Brian Martin, FIG Partners.

Hey, George, can you talk about your -- you talked about the M&A and kind of your pricing discipline, but just kind of what your target returns are when you're looking at these transactions?

Well, we're trying to do transactions, and much like with the FDIC-assisted transactions, both FDIC-assisted and traditional M&A, where we'll have a high-teens to low-20s return on equity from the transaction.

So it's really pretty simple. We're just -- we don't want to do things that are going to yield us a low ROE, even if they yield incremental profits. I could go out and do a lot of transactions, with our stock price where it is, that would certainly be accretive to earnings per share. But they would use up our capital in ways that I don't think would maximize our ultimate longer-term returns.

So we're trying to do transactions that would have sort of a 20%, plus or minus, ROE. And when I say 20%, I'm thinking kind of 17% to 23% type ROE range that will contribute that kind of result longer term. And that's generally been the way we've modeled and looked at all of the opportunities we're looking at.

Okay. And as far as -- you talked about kind of the immediate use of capital, I guess why are you still, I guess, optimistic that the FDIC is a greater piece than the -- kind of the whole bank deals? I guess is there something that's giving you that indication?

You know, we actually had several guys that work with me to draft a conference call script. We had a lengthy discussion about should we flip the order of those at this point? And it was sort of a tie vote as to whether one was more likely than the other.

And there was a difference of opinion among our group. So we left it in the same order we had communicated it previously. But that's a really good question. And a reasonable man can differ on which should be number two in that pecking order and which should be number three.

Obviously, if we get out here a quarter or two and haven't done an additional FDIC deal and we get another traditional M&A bank deal under our belts, the guys who are advocating to change the pecking order of that disclosure are going to have the more favorable cards in their hand.

Okay. And as far as the -- you mentioned you brought a few lenders on. I'm just wondering if you can give a little bit of color on them, maybe what type of book of business they have or just size of book of business. And I assume that's factored into your -- well, I guess it's not factored into the growth that everybody talked about earlier, but I guess it will be additive as you go forward.

Well, the key to these guys is their experience and knowledge and ability as a lender. You know, whenever you hire a new lender, you hope that that new lender is going to know people and have relationships that will want to follow him.

But we've really never hired lenders so much based on those relationships or what book of business they had at a prior bank, because they've got to leave all that data behind and all that information behind and just go out and start from scratch building a new portfolio.

But we've hired a couple guys to our -- additions to our team in Wilmington, one in Bluffton, one in Mobile. We've added some lenders in some of our legacy markets as well. We are constantly trying to build a team. And just like any professional sports franchise, you know, they are always looking to add guys that bring new skills, ability, and talent to the team. And if you've got guys that are not performing like you want them to, you've got to cut those guys from the team so you can make place on the bench for somebody with more talent and ability.

So, we're doing that very actively. And I think we've made some really good hires, and we've got some more discussions going on with others. So we think that those will translate into additional growth for us in those markets in the next year or two.

Okay. And then just maybe the last question, just maybe how we should think about provisioning as it relates to growth with some of the continued improvement in credit quality as you look forward here, especially with the growth ramping up.

Well, you know, we gave guidance at the beginning of the year that we expected our provision expense in 2012 would be less than in 2011. Obviously, we've commented in several conference calls that we don't mind provisioning when we are provisioning for expansion of the portfolio and growth in a high-quality loan.

So, what provisions will look like next year is really going to be a function of two things. One is the growth in the portfolio, which I hope pushes us toward higher provisions, just because we've got mega growth, and a reduction, I think, in allocated allowance amounts and so forth resulting from better asset quality.

So those things tend to cut two directions. The improving asset quality trend, that I think will continue to bode for a lower reserve percentage, a lower allowance allocation percentage as a percentage of loans. But at the same time, growth in the portfolio, if we can achieve as much as I hope to, would actually cause provisioning expense.

So you'll just have to run your model and project the growth in there. But I do think the allowance allocation percentage will continue to decline next year, because I think we are just continuing to see things that we've got specific reserves and allowances set up for now get better and heal up and either get well and no longer require a specific allowance or get liquidated and pushed off the books and eliminate the need for the specific allowance that way.

Okay. That's helpful. And just the last thing, and maybe you mentioned this already, but the covered loan yields, I know you said this level was a good run rate to think about. What was the -- what drove the increase? It had been kind of stable at that 8.60% type of level and jumped up this quarter. Was there something that led to the uptick this quarter, or did I miss that if you said it earlier?

No. Some of these loans are performing better than projected, and there's additional discount in there getting accreted into income on them. And they -- I -- as best I can tell, and the accounting for these things is fairly involved and complicated, but as best I can predict it, I'm thinking that our third-quarter rate on that is going to be pretty close to where we're going to be for the next couple of quarters on that. Maybe a little bit of a downward drift to that, but not a ton, I don't think.

And if we continue to get further improving performance out of them and have more accretion, that number possibly could go up a little bit. So, we're just going to have to kind of see how those play out, and it's going to depend on the performance of those portfolios.

Okay, thanks very much for the color.

Joe Fenech, Sandler O'Neill.

My questions are answered, thanks.

Peyton Green, Sterne, Agee.

A question for you on the covered loans. What was the balance of accretable yield at the end of the quarter versus the nonaccretable discount?

That'll be in the Q. We don't have that number available to us right at the moment. So I'm sorry about that.

No, no. Just directionally, do you get a sense that nonaccretable moved into accretable over the course of the quarter?

Some -- possibly. I don't know. Let us get the numbers in the Q and give you a disclosure in the Q on that (multiple speakers) go through that.

Okay, great. And then the last question. With regards to M&A, how would you characterize the landscape today compared to a year ago or even two years ago? Are there many more opportunities?

And then secondly, what's your capacity? How many deals could you handle at one time?

We would -- we've got the capacity to handle multiple transactions at once. And we gained a lot of experience and ability as we tested our troops in the FDIC environment. And as you well know, we did two acquisitions in a single day there. And I think we had three ongoing conversions going in different stages of progression at once there.

So we would be very comfortable with two or three or four transactions going through the pipe at one time in various stages of development and closing and conversion process. It wouldn't bother me at all to have four transactions in a pipe at once.

Now, who knows if we would ever be able to stack enough successes in a short enough time period that we would have three or four going at once. I don't know. But we're trying. We're bidding, and we're doing underwriting and due diligence and exploring opportunities constantly. So, if we get fortunate and managed to have a good, successful run of hitting transactions, we would be comfortable doing multiple at once.

Okay, great. And then, what is your sense in terms of the covered loan piece? Where do you think it will bottom in terms of -- or start to stabilize versus the runoff that you've experienced?

I don't know. We'll have a little more clarity on that in the coming quarters. And by -- I would suspect by this time next year, we would really be able to give you a really good, accurate answer on that.

There is still -- I mean, some of these portfolios, we've only been in them 18 months. So there's still a lot of questions about whether certain loans are going to heal up and become long-term, viable customers, or are they going to be something that never gets to a point we're really comfortable with it? There's a goodly number of relationships in these portfolios that are on the bubble.

Now, we've assumed in our valuation of those assets that they all go in sort of an adverse sort of way. But we are seeing a lot of relationships where customers are stepping up and fixing problems and addressing things in a way that makes us want to continue a long-term relationship with them. And I think we'll have a fair amount of color on that, how that plays out by this time next year. But it's a little too early to know for sure to give any meaningful guidance on that.

Okay, great. Thank you very much.

At this time, there are no further questions in the queue, but I can provide one final reminder to everyone, that that is star-1.

If there are no further questions at this time, that concludes our call. Thank you so much for joining us today. We appreciate it, and we look forward to talking with you in about 90 days. Have a good rest of the day. Thank you. Thank you, Andrea.

Thank you. And with that, ladies and gentlemen, that does conclude today's call. Thank you for your participation, and have a great day.