Bank OZK
Q4 2012 Earnings Call Transcript

Published: 17 Jan 2013

[Operator:]

Good day, and welcome to the Bank of the Ozarks, Inc. Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Susan Blair. Please go ahead, ma'am.

[Susan Blair:]

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 and year 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 margins; net interest income; 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, including our goals of achieving a sub 40% and, eventually, a sub 30% efficiency ratio; asset quality and our various asset quality ratios; our expectations for net charge-offs and our net charge-off ratios; our allowance for loan and lease losses; loan, 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; the opening and relocating of banking offices; our plans for traditional mergers and acquisitions; our goal of making additional FDIC-assisted 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 Statement 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.

[George Gleason:]

Good morning, and thank you for joining today's call. We're very pleased to report our excellent results for both the fourth quarter and the full year of 2012. Net income for the quarter just ended was our second best ever, coming in only behind the second quarter of 2011, when we benefited from a significant bargain purchase gain from 2 FDIC-assisted acquisitions. Likewise, our net income for the full year of 2012 was our second best ever, trailing only our 2011 net income with its significant bargain purchase gain from 3 FDIC-assisted acquisitions. Our 2012 results included many highlights

[Operator:]

[Operator Instructions] And we'll go right to our first question from Michael Rose with Raymond James.

[Michael Rose:]

Just wanted to get some color on the growth in unfunded commitments. Can you just kind of describe where that's coming from? I know, historically, it's been majorly construction related. And then can you give some granularity on kind of the average size of the credits that you're -- in that pipeline that you're kind of putting on the books?

[George Gleason:]

Yes, Michael, would be happy to do so. Once again, the construction loan book continues to be the principal source of those unfunded balances. There are some C&I loans and some other lines of credit, but the majority of that underfunded balance relates to construction loans. And, again, we're very comfortable with that. We think we do an excellent job with that. We are putting on a lot of credits that are larger credits. Those credits may range from a few million dollars to $30 million, $40 million, $50 million in size. The key to all of that, I think, is the conservative underwriting on those and the substantial amount of cash equity we're getting. A lot of these credits have 30% and 40% cash equity in them. The larger credits particularly tend to be more in the range of 45% to 50% to 55% cash equity in them. So our -- I think our last quarterly report that we issued, 10-Q, indicated that in our construction and development loan book, we had about 44% cash equity on average. Greg, is that right? And I would say that is probably still going to be about the average. We're going to have [ph] somewhere 44%, 45%, 47%, 43% [ph] cash equity probably on average on that whole portfolio. So if you pick really good sponsors that have great experience and strong financial statements, you get 40% to 50% cash equity on average in them. And you document and service things in an extremely intense manner as we do, we think that's really, really good business.

[Michael Rose:]

Okay. So I think reconciling that with the margin comments, it maybe implies that competition is getting maybe a little bit more intense than it had been, let's say, over the past year. So as you go up in size and credits, and you have larger competitors getting back into the construction or A&D side of things, is that kind of what's relaying into the lower guidance if you grow loans more?

[George Gleason:]

No, the -- that's not really it at all. Certainly, we're in a very competitive environment, but, obviously, every new loan that we book in the competitive environment today, even if we're getting a 5.5% or a 5.25% floor on it, is diluting our margin somewhat. As I mentioned in the call, our margin in the last quarter on our non-covered loan book was -- Greg, help me...

[Greg McKinney:]

5.82%.

[George Gleason:]

Yes, 5.82%. And the loans we're booking on average are not at 5.82%. Some of them have floors and rates in the 4s, some of them have floors and rates in the 5s. We have some loans that are below 4, some loans that are 6 and above. But the vast majority of the loans we're booking are in that 5.5 something-percent range, but they are not at 5.82% in -- on average. So that's why if we book $480 million of loans instead of $360 million in loans next year, it tends to blend the margin down 5 more basis points. It's not that we're not getting good rates on these loans and getting better than rates that a lot of our competitors are getting, it's just simply that we're not getting as good a rates as the historical yields in the portfolio, so it's averaging that down. When you factor in that growth that's actually blending down slightly your yield on the legacy loan book, and you factor in the fact that growth in the legacy loan book, combined with shrinkage in the covered loan book that's yielding 9%, more or less, that just tends to average that margin down.

[Michael Rose:]

Understood. And one more question, if I could, and then I'll hop off. I just wanted to get a sense on the expense side of the equation. It seems like you have a lot of stuff in process in terms of branches, offices, et cetera. Can you just kind of walk us through what's been accrued for and kind of what's in the run rate, and maybe what is -- will come out once those initial start up costs are through?

[George Gleason:]

I don't know that I can give you a lot of color. I mean, everything that should be accrued for has been accrued for. I don't know how to color that. In regard to Genala, we did sign all the conversion contracts and de-conversion contracts on that -- the last day of the year or the day before so that we could make sure we could accrue those in the fourth quarter because we didn't want those carried over. So the things that -- there may be some minor contractual arrangements they have that our operations people are de-converting and so forth, there may be some minor costs there, but really, as I said on the call, the vast majority of the Genala costs are accrued and we worked real hard to get them accrued so we could expense them in Q4 and not carry them over into 2013. So there will be some modest costs in Q1 and Q2 related to that conversion, but as I said, the vast majority of it has already been booked and expensed.

[Operator:]

And our next question comes from David Bishop with Stifel, Nicolaus.

[David J. Bishop:]

A quick question in terms of the covered loan portfolio. It looked like a little bit of an acceleration in terms of the loan paydown for this quarter, I think it was somewhere close to 34% annual rate, which is a little bit higher than the year-over-year paydown rate. Anything unusual this quarter in terms of trying to resolve some of these assets that have impacted the acceleration?

[George Gleason:]

Well, not really. That just ebbs and flows with payoffs and paydowns, and that number's been surprisingly linear. Actually, if you look at the trend and in my investor presentation's got a slideshow -- a slide on that, that shows the trend of that over the last 6 quarters since our last acquisitions in the second quarter of 2011. And that's actually, to me, been surprisingly linear in the way it has run off. So there was not anything unusual in that. We're basically working to do several things for those portfolios. One is the stuff that's just -- that are just dead loans that are never going to work, we're working to foreclose those and liquidate those as quickly as possible. There are also a considerable number of loans in there that are really close to being a quality that we would be comfortable with, and we're working really hard to rehabilitate those loans and get additional collateral or get paydowns or adjust a deal structure as those things mature and so forth, so that we can turn those into good loans we'll want to keep long-term. And then there's an element of those portfolios that really meets our credit standards, and we'll start here more significantly in 2013 than we had before, beginning to identify those loans as they mature, that really meet all of our credit standards and we really like, and we really want long-term and pulling those out from underneath loss share. So we'll have a little more transference in 2013 and 2014 from the covered loan book of loans that stay with us but move out of covered loans and move into new loans in our legacy book. So that's sort of the strategy for that, nothing really unusual. In Q4, I would tell you, I thought we made a tremendous amount of progress in the quarter on some of the nastier problem assets we've been working on, and I think we'll see that level just get much better over the course of 2013. I think we're really getting into the back end of working through a lot of the problems there.

[David J. Bishop:]

Great. And then in the preamble you also mentioned, excluding the unfunded closed loans and also a good pipeline of loan requests, are you seeing any fallout from some of the lingering issues in DC in terms of the fiscal cliff or any sort of issues falling out to your customer base?

[George Gleason:]

Not terribly, no. I mean, I think we've seen people who probably sat on deals a few weeks to sort of see how banks played out, but that seemed to lead to a rush of closings at year end. And things weren't resolved at year end, but there still seemed to be a great rush of closings at year end. And you probably noted that when you looked at our average loan balances for the quarter and looked at our period end loan balances for the quarter. We had a lot of growth, but it once again came very heavily weighted to the back end of the quarter. That's been one of the challenges we faced in all of 2012 is we seemed to get -- we had a couple of quarters of really good loan growth, but in those quarters -- even in those quarters, the growth seemed to be sort of back-end loaded. So we're real hopeful. And I think it will play out this way that in 2013, that growth is going to come in a little more on a balanced basis. And I just think that, because of the way it looks like fundings will occur in the first quarter, I think we'll have positive growth in January and more in February and more in March. But I do think we'll have a little more balance in the monthly growth in at least the first quarter of 2013 and probably going forward. Based with the unfunded balance of loans we've got on the books, you can pretty well project out with a reasonable degree of certainty when those loans are going to fund, when those construction draws are going to be taken down. So that big volume of unfunded loans suggest to me we're going to have a little more level of funding in the portfolio in 2013.

[Operator:]

And next we'll go to Jennifer Demba with Suntrust Robinson Humphrey.

[Jennifer H. Demba:]

You had mentioned earlier in the call that you think acquisitions will be a more important part of growth next 1 or 2 years. I'm wondering what you're seeing in the pipeline, whether it be from incoming calls or outgoing prospecting? And what type of institution you're seeing is relatively more amenable? Are you seeing healthier institutions -- relatively healthier perhaps more amenable to discussion?

[George Gleason:]

I would say, yes, we are seeing healthy institutions more amenable to discussion. As I said in my prepared remarks, we continue to be very active in this arena. We're looking at a lot of things. We're identifying and analyzing a lot of opportunities to provide a little amplification on those prepared remarks. There are far more opportunities out there than we have the Human Resources to look at and analyze, so we're trying to really prioritize things that we think have a reasonable prospect of success and would be a nice fit for us. And we do expect that this will be an important part of our business in 2013, 2014, and probably beyond that.

[Jennifer H. Demba:]

What type of acquisition would you be comfortable making at this point, obviously Genala was really, really tiny?

[George Gleason:]

Yes, it was. Genala was a really good deal to kind of cut our teeth on as a dress rehearsal if you would for a bigger live bank acquisition. We had developed a really good system for doing the FDIC failed bank deals. We hope we're going to get to do some more of those, but we knew that there would be differences in how a live bank transaction would work. It had been 9 years since we had done our last live bank transaction, so Genala was really a good exercise for us and we liked it because it was -- we liked it for a lot of reasons. But one of the reasons we liked it was, it was a small simple transaction that would be a good one to develop your model and work out any kinks in that process. So with that done and done very successfully, that seems to be all going extremely well and no real glitches or hitches in our processes there. So I would say we're ready to do much larger transactions if they come about. If you look at our capital position now and what our internal limitations are on capital, we could do about a $2.9 billion in acquisitions all-cash and still be within our capital -- internal capital guidelines, which are above the regulatory guidelines across the board. So I don't think we're looking at anything today that's that large, but size would not bother us if it was a transaction that could generate we thought our target returns on equity, both in the short run and the long run, so size is not really an issue. We would do another Genala-sized deal or do several Genala-sized deals if a $1 billion, $2 billion or $2.5 billion or $2.9 billion acquisition came along that met our criteria, we would not shy away from it at all.

[Operator:]

Our next question comes from Matt Olney with Stephens Investment Bank.

[Matt Olney:]

Good to see the progress on the loan growth initiative in the fourth quarter. I wanted to kind of dig down in that. And a lot of your peers have been talking about paydowns of commercial real estate being elevated in recent quarters just due to cheaper alternatives for some of the borrowers. And some of your peers were also saying that this headwind could continue in the next few quarters into 2013. So I guess my question is, what are you guys seeing within your commercial real estate book as far as paydowns relative to kind of a normalized level?

[George Gleason:]

Yes. We had a tremendous number of paydowns in the fourth quarter. And we've got a tremendous number of paydowns projected in our month-to-month and quarter-to-quarter models for next year. So yes, I think that will continue. In the quarter just ended, our CRE book grew $11 million outstanding. Our construction and development book grew $10 million outstanding. We had about a $3 million shrinkage more or less in agra. Multifamily was up $36 million and C&I, surprisingly, was up $31 million. So we had broad-based growth across a number of different segments of the portfolio. We did see a lot of prepayments, but we also had really, really good volume of new originations, obviously, resulting in that growth for the quarter.

[Matt Olney:]

So in other words, George, if I understand correctly, it sounds like within your loan growth goals you talked about before, you're anticipating continued paydowns at CRE remaining elevated kind of near current levels, is that fair to say?

[George Gleason:]

Absolutely. We do -- get good pricing on our transactions and we do transactions, typically, at lower leverage than most banks. We got a lot more cash equity in our deals than most banks do. That combination of rate and leverage leads to a lot of prepayments because you get guys that come to you and maybe it's a complicated project and we get paid extra for being able to understand and help them accomplish that project. They get it up and stabilized, and it's up and stabilized and performing at a high level, and it becomes very simple once it's up and stabilized and performing at a high level. So they got places they can go with that, that are going to let them cash out a lot of equity and do much higher leverage than do a nonrecourse with a much lower -- longer term fixed rate than we will do. So we're going to lose some stuff to long-term fixed rate. We're going to lose some stuff to high-leverage nonrecourse. We're not going to do the high-leverage nonrecourse. We're not going to do much long-term fixed rate stuff. So we're going to have a lot of prepayments, that's inherent in our business and that's built into our model and our projections.

[Matt Olney:]

Okay, that's great color. And as a follow-up, any update as far as kind of rollout of the Real Estate Specialties offices. It seems like you talked about Houston being in the drawing board in the near term, what are your other thoughts as far as additional branches over the next few years?

[George Gleason:]

Well, we have aspirations to have a Real Estate Specialties Group office in Houston, as you mentioned. We do a lot of business down there already and we can do a lot more if we had boots on the ground actually in Houston. But as you and I have discussed, and as I've said publicly a number of times, the timing of the rollout of those offices is not dependent upon, "Gosh, there's a great market there", it's dependent upon, "Why, I've got a great guy to go to that market." And we're developing some talent within the team now that will be talent that will open future offices. It takes a number of years, 4 or 5 years probably, if we've got a really smart guy to develop, to open one of these offices. So we will go to those markets when the talent is right. Now there occasionally is an opportunity, not often, occasionally an opportunity for us to hire some talent that we really like, that really understands how we think about real estate and really understands real estate and knows how to do what we do. Those guys are fairly rare. If we can find one of those guys in the course of 2013, we might open another Real Estate Specialties Group office in 2013. Our models and assumptions and predictions for 2013 are predicated upon no new Real Estate Specialties Group offices opening in this year. But again, if our talent development or talent acquisition would allow us to do that, we would certainly look at it. Houston would be one of our, if not our top choice, one of our top choices. There are a number of other cities in the future that we would like to have staff in. But I think, probably, it would be better for me to not comment on those cities until we get a little closer to that being a reality, and we'll start talking about it when we think we're there.

[Operator:]

[Operator Instructions] We'll go to our next question from Blair Brantley with BB&T Capital Markets.

[Blair C. Brantley:]

One question -- actually, 2 questions. First question is, how much of that growth this quarter was from the unfunded commitments versus just normal growth?

[George Gleason:]

Blair, I can't even begin to tell you that because there are so many fundings and so many payoffs and so many new loans originated. And I don't track -- I don't look back at what we funded on loans in the quarter, I just -- I keep looking forward. And here's the unfunded balance going forward, that unfunded balance, Greg, went up how much in the last quarter? Was it $80-something million?

[Greg McKinney:]

$70 million [indiscernible].

[George Gleason:]

$70-something million. So we had a nice growth in both our outstanding balance of loans. We had a nice growth in our unfunded balance of closed loans, both of them grew very nicely in the quarter. And we did that notwithstanding the fact, as I've already said, that we had a number of very substantial payoffs in the quarter, as well as regularly scheduled paydowns on thousands of loans. So that number is real dynamic, and I just don't look back at what -- where it all came from. I'm looking forward at the pipeline.

[Blair C. Brantley:]

Okay. My second question is, how does the -- or actually, how did the Southeast franchise fit into your loan growth picture going forward? And if you could give us an update on the trends there, that would be helpful.

[George Gleason:]

It's beginning to contribute a little more. For example, non-loss share loans in the state of Alabama, which at September 30 were 0.05% of our total non-purchased loans. Now, Greg, does this have -- does that breakdown have Genala in it? I guess that is Genala.

[Greg McKinney:]

Yes.

[George Gleason:]

That went up substantially because of Genala. But we've had some good loan closings and fundings, some good stuff working in Mobile, Alabama, and Genala's in this so I can't break out what that Mobile piece is. And we've had some good fundings in Wilmington. We've got some things working in Bluffton. We've got a good piece of business we're working on through our Atlanta office in Savannah. We've got a couple of good prospects on some decent loan deals in Bradenton, Florida. So we are seeing some traction, positive traction in the southeastern markets. Now a lot of these markets continue to be fairly -- adversely affected by the recession. They are slowly recovering, but we are seeing them recover. We're seeing some property values -- I'm seeing quite a few of our OREO sales now, where we're selling properties, above the last appraised value. And that was a very rare occurrence a year or 2 years ago. So there's a little bit of positive momentum there. Texas is still the biggest growth piece of our company. Ignoring loss share loans, just covered loans and including the Genala deal in it, the purchase loans in it, Texas accounted for 43.4% of our loan book at year end, that's up 0.2% or 0.3%. North Carolina was up 0.1% at 4.08%, reflecting some growth in Charlotte and some growth in Wilmington both. Arkansas, for the first time in history, I guess, of our company, dipped under 50%. Our Arkansas offices accounted for 48.5% of our loan book, excluding loss share loans at the end of the year. Georgia has grown now to 1.9%, up from 1.8% the last quarter, so that's 0.1% more. And then Alabama, of course, I mentioned was up to 2.1% of our loans, but that does include the Genala loans in that. So the Southeast is contributing more, and we expect it will contribute more in our minimum $360 million and minimum $480 million projection numbers for 2014. There is pretty modest numbers in there, it's for the Southeastern offices. We are keeping our expectations down because those guys are limited to just what the opportunities of the market will afford them, and I don't want to push them to try to do more that can prudently be done in a tricky economy.

[Operator:]

And we'll go next to Brian Martin with FIG Partners.

[Brian Joseph Martin:]

Just a couple of questions. You talked about M&A, I mean, can you, I guess, characterize the pipeline today versus 6 months ago as far as is it better, is it worse, about the same?

[George Gleason:]

I would say it was full and it is full. As I said in response to Jennifer's question, I think it was Jennifer, we are looking at more transactions than we can -- or there are more opportunities out there than we can look at, and we're looking at all we can look at. And that was certainly true 6 months ago, it's certainly true now. I think, probably, we're being a little more efficient in how we're looking now. Dennis James, who's our Director of Mergers and Acquisitions, was new to the job, starting in, really, January or February of 2012. So 6 months ago, I think he was still developing sort of a game plan and so forth. He is a lot more structured and focused and has a better plan, I think, now than he did 6 months ago, just because that's evolved over the course of the year. And Dennis is now reporting to Greg McKinney, our Chief Financial Officer, instead of reporting to me. And we have sort of wed together the teams of folks that are working on loss share and non-loss share. And instead of running -- having different guys running separate models, those guys are now working together and we push those teams together, not totally, but created a real link in unity between them and what they're doing and our allocation of due diligence resources and so forth. And we just did that within the last 2 weeks, Greg, I guess, and right at year end. And I think that's going to make us more efficient and more effective in that effort in the future.

[Brian Joseph Martin:]

Okay. And do you think that -- you talked about maybe looking at a bigger deal, maybe the dress rehearsal being the Genala deal, I mean are you finding that pricing for live deals at a higher sized point is more difficult or I guess, there's less -- there's more like higher expectations by the sellers?

[George Gleason:]

Brian, I would defer to you and the other analysts to assess that question. What we're looking for is transactions that fit with us. And I guess, to add a little more color to the response to the question previously answered, there are a lot of banks out there that, while they've not been half performing, they are not on the death bed either, but they're in markets where they have a good franchise but their potential to grow in their market with their balance sheet and their business model and their team is fairly limited. And a lot of these bankers realize that without more capital and without more specific expertise and capabilities in certain areas that they are basically trapped. They can't grow without that. They can't get those things that they need to grow given the size and the scale that they have. So I think there are a lot of banks that realize they're just in a situation where they're not going to fail. They may be modestly profitable, but they'll never achieve their full potential as a freestanding enterprise. And those sorts of situations are -- seem to me to be a ripe opportunity for us to go in and bring those guys on to our team to provide them the elements that are missing in their franchise, their company now to be much more successful in those markets than they're currently being. And those, I would say, are the opportunities that we are focusing on more than any others.

[Brian Joseph Martin:]

Okay. And then just lastly, 2 things. The FDIC-related income as it flows to fee income, can you just talk about just from a macro perspective your thoughts from -- as you look at full year '12 to full year '13?

[George Gleason:]

All that is behaving about as we thought. We -- you and I talked about this, and I talked about it with pretty much everybody that would listen in the last half of 2011, because folks where saying then, "What's going to happen to all these line items, loss share is going to go -- go away over time and we suggest it will." And our expectation was, is that 5 elements would move and 3 would move favorably and 2 would move adversely in it. Obviously, the quantity and volume of covered loans would decline, so our super high yields from those would have less and less impact on our income statement because just the balances would go down. And they're going down in a very linear fashion as we pretty much expected they would. And secondly, we knew that, likewise, as we collected the FDIC receivable, that the accretion income on that receivable would diminish. But we told folks in 2011, but what's going to happen is, is our recovery income will go up in 2012 and '13 from where it is in 2011, we think. And we think our gains on sales and covered assets will go up in 2012 from 2011 or 20 -- I'm sorry, in 2012 and 2013 from 2011. And we think, over time, that our significant overhead expense related to loan collection and repo and OREO costs and so forth will trend down. So if you look at 2012, that's exactly what happened last year. Yes, the balances went down so the interest income went down, although the percentage actually went up from mid- to high-8% to low-9%, so the yield went up. And that was not surprising either. The accretion income went down because the receivables being collected. As expected, our recovery income, other loss share income was up noticeably in '12 versus '11. I think, '13 is another good year for that. Our gains on sales of covered OREO went up noticeably in '12 versus '11 as expected. I think, '13 is another good year of gains on sale income potential. And I think in '13, we'll realize really what we didn't realize in 2012, and that is a downward trajectory on loan collection or repo expenses. So some of these things will contribute less income next year, some will stay the same. I think the reduced cost will likely be more. It's impossible to know exactly how these numbers play out, but our thought is that 2013 is another really good year of income from these FDIC line items. And as we predicted in 2011, midyear 2011, we think we've got the growth engines on organic growth going at a good enough clip, that as loss share does wind down and become less of our income statement in future years, whenever that is, that the growth in our legacy loan income will give us positive earnings momentum. And that's been the way we've modeled this and planned this. And we started planning that before the last 2 FDIC acquisitions, implementing the steps that we thought it would take to generate the legacy growth that would give us that positive earnings momentum, pretty much without interruption.

[Brian Joseph Martin:]

Okay. And the last thing, George. Just remind me, I guess, the OREO balance that you've got, I thought you said it was just one large property. Do you have any update on where that stands?

[George Gleason:]

There are not really any large properties in there. I think the largest asset in there are, there are a couple of assets that are right around $2 million. One of those is a lot deal that needs to wrap and one of them is a lot deal where we're selling lots really, really well. And I think our basis per lot is down to about, Greg, $11,000, $12,000 a lot, something like that. And we're selling lots from $40,000 to -- $39,000 basically to $70,000, $80,000 something in there. So we project that, that asset, and I think we sold 20 or 30 something lots in there last year, we project that asset will go to a 0 basis. All the sales are all coming in and just going straight against the OREO balance, so we'll probably be at a 0 basis on that sometime mid-2014, I would guess, given our sales velocity. And we think we'll have about $4 million of lots left in there when we hit a 0. So that should be an asset that generates some nice gains on sale income in 20 -- maybe late 2014, 2015, 2016, as we sell that on out. And that's going really well. The subdivision was dead when we took it over and we've really got it amped up and going, and we finished what needed to be done to get it really running right and it's going to be a future success story for us on that. But those are the only 2 significant.

[Operator:]

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

[Jordan Hymowitz:]

Could you comment as what you've seen in the past few weeks in your mortgage business? Have you seen any slowdown in either volumes or gains -- or narrowing of gains on sale margins?

[George Gleason:]

I haven't really -- not as far as I'm aware, I haven't seen any changes in margins, Jordan. We had about 12 inches of ice and snow that hit Little Rock starting late in the day on Christmas Day and it continued to snow through the next day, and there were 250,000 utility customers in Central Arkansas without power. And you know, Arkansas is a pretty small state, so businesses were shut down. A lot of businesses didn't have power for 3 or 4 days between Christmas and New Year's. A lot of residents didn't get power back for a week. People in Arkansas don't -- are not noted for their driving skills on snow and ice, so there was just not much going on for a number of days. We were functional here at our headquarters because we've got generators here, but in our branches that didn't have generators, we had 10 to 20 branches that -- who were unable to function at all because they had no heat, no air, no power for several days. So it really kind of fouled up business activity for the last week of the year. And that's had -- I don't know how that really has affected our mortgage business, it's impossible to know. But normally, you have a seasonal slowdown for mortgage right around the end of the year and the first week or so of the new year, and you throw that storm in Central Arkansas where most of our mortgage people are on top of that. And I don't know that the activity from the last week or 2, if I knew it, and I really don't know it, but even if I knew it, I don't know that that would give you a very good read on predicting anything for 2013. We've had some kind of unusual conditions here in Central Arkansas.

[Operator:]

And we'll go next to Peyton Green with Sterne Agee.

[Peyton N. Green:]

A question on the covered loans. I think you mentioned earlier in the call that the prospect for taking some of those loans as they go through the re-underwriting and grading and renewal process is that some of those could move from the covered portfolio into the -- I mean, non-covered portfolio. And I guess, for the portfolio overall, covered loans are down from about $910 million on average in the second quarter of '11, down to about $600 million in the fourth quarter of '12. I was just curious, at this point, now that you've been through the bulk of those loans at least once, most -- a good number twice, what does a loan look like that's coming out of that portfolio? I mean, what kind of yield would it have? What kind of collateral would you have to have, coverage wise, to make you comfortable with doing that? And is '13 a really good year for that or is it really '14?

[George Gleason:]

The longer we go in the process, the better the year is going to be for doing that because, obviously, the loans get more seasoned, the equity gets built up. Hopefully, the market conditions stabilize to improve over that period of time. So the longer we go the more likely it is. What we -- and I'm not a poker player and this comment is going to reflect that, but what I've told the guys is, is that aces, straights and flushes come out of the loss share portfolio and go into the legacy portfolio. And if it's not aces, straights and flushes, don't move it. It's got to be just super unquestionably good stuff. So I've made that comment to somebody the other day and they pointed out to me that any 4 of a kind would beat a straight or a flush, I don't know, I'm not a poker player. So obviously, my analogy wasn't quite right. But the premise we're working under is it's got to be a super good loan, there's just no question that there's ever going to be anything no matter what happens to property values with it. So we're being very reticent about giving up our FDIC guarantee [indiscernible] and extensions of those loans unless we think they're just bulletproof. As we get closer to the end of loss share, we'll probably get that down to where 3 of a kind or 2 high cards of a kind may come out of there, and the normal winning hands there, we'll take out and bring into our portfolio. The question I thought you were going to ask, and it's a really good question is, does our $360 million growth number for 2013 as a minimum and $480 million for 2014 include loans transferring over from 1 portfolio to the other, and it does not. But if we transfer $30 million of loans over, I would expect $30 million more of growth in the non-covered portfolio because we've just assumed that they stay where they are.

[Peyton N. Green:]

Okay. And I guess, thinking about that I know, and this goes back a couple of years maybe, but I'm thinking about those portfolios when you originally did your due diligence and you got them and maybe you had had them for a quarter, the general characterization was that some portion you never would have made, some portion had bad structure or pricing, and then some were actually good loans to good customers that you probably would have made, albeit maybe differently than that bank had done it, but would have been customers you would have banked and loans that you would have extended. Any sense of the $600 million that's there today, how much that might be?

[George Gleason:]

I think, probably, when we started this process, I would have said, "well, that's about 1/3 and 1/3 and 1/3" and something like that. And I don't know that, that number has changed a lot. I would say the average quality of it has gotten better just because we worked through so many problems. But I'm working with these things, one loan at a time. Typically, what I'm seeing is 20 to 15 to 40 a day. And the better the loan, we're tending to do the modifications and extensions on the better loans for 2 years or 3 years, the more problematic loans that have taken a lot of work to try to fix some more [ph] , so forth, we're typically extending and modifying those 1 year. So I'm seeing a disproportionately part of -- a large part of the challenged ones because the others we're tending to kind of solve [ph] away for a longer period of time to take one more look at them before loss share expires. So I don't know that -- I'm looking at the portfolio in a way to give you that. But my sense is that portfolio is getting better and better as we go through it.

[Peyton N. Green:]

Okay. And then have you seen enough recovery in real estate values in those markets to maybe benefit OREO gains going forward compared to what you would have originally projected a couple of years back or is it still too early for that?

[George Gleason:]

Well, when we modeled those asset values, we calculated our OREO values on the assumption that by the time we got those assets sold, that values would have gone down further. And that was a very accurate assumption. If we had based off appraisals and sales value, we have -- there was a whole pot full of that OREO as you know, and we still got $50-something million of that stuff. Although I think we cut it down, what, $10 million or $12 million, $15 million in the last 3 or 4 months, something like that. We're working through it pretty quick. But we're adding more to it all the time. We may sell $10 million and add $5 million to it. But we predicted values would continue to decline and that was a really good observation, because they did for a considerable period of time. So we had those things written down to allow for that in most cases. And we are seeing values begin to get a lift in a lot of markets, particularly in residential properties. We're seeing those begin to come back and have positive sales prices versus the last appraisals. We're seeing it on well-located, improved commercial property. Poorly located commercial properties seem to just be languishing out there. And then some residential lots and commercial lots in really excellent locations are doing well, but most lots in either commercial or residential are not showing much positive traction yet. In Georgia, particularly, there are just way too many lots. And when you're in a market where there's a 10- or 15-, 20-year supply of lots, they're just not going to come back very quickly. But there is developing a significant market out there even in those markets, so bottom fishers who are out there buying these assets as long term hold plays, and we're glad to see those guys. They're at least providing some bid in some of those markets, where a year ago there was no bid.

[Peyton N. Green:]

Okay. And then as you go into '13, and knowing they were there, how does your job description change?

[George Gleason:]

I'm beginning to spend less time, less of my time working on the problem assets. I really wanted to get to know these portfolios. I wanted to get to know all of our lenders in these new markets and have a couple of years of opportunity to really interact with those guys and train them and coach them. I wanted to get to know all these markets really well. I've still got a lot to do personally related to these loss share portfolios, but I'm spending more time the last few months working on more futuristic things and evolving our management team both in the newly acquired markets and in our legacy markets, developing our management team for the future, beginning to spend some time looking more personally at these acquisition opportunities. If we do like more substantial transaction, something -- $0.5 billion to $1 billion or something, I've got myself now in a position where I can personally be the lead point person on that acquisition, and I definitely would want to do that if we do a bigger transaction. So my role is changing and my role just always adapts. I go and spend my priority time on whatever the priorities in the company are at that point. And we're so blessed to have such a broad management team of folks that, if I decide I want to go spend 80% of my time working on our new loss share markets, we've got other guys that can step up and carry the ball very effectively on all the other roles. And if we make a sizable acquisition this year, which I hope we will, whether that's a $0.5 billion or $1 billion or $2 billion, whatever that ends up being, and I want to go spend the vast majority of my time working on that and really put my fingerprints all over that deal and conclude that's the highest and best use of my time. I can shift other duties to other guys and I can go do that because that's the priority where I can have the most impact and achieve the most dollars for shareholders. So that's the way my job works.

[Operator:]

And now, as we have no further questions, I would like to turn the conference back over to our speakers for any further or closing remarks.

[George Gleason:]

All right. Thank you, guys, for all being on the call today. We appreciate the good questions and your attention. That concludes our call. Thank you. We look forward to talking with you in about 90 days.

[Operator:]

And that does conclude our conference today. We thank you again for your participation.