Bank OZK
Q1 2013 Earnings Call Transcript

Published: 12 Apr 2013

[Operator:]

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

[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 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 outlook for the future. To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic, real estate market, competitive credit market and interest rate conditions; revenue growth; net income and earnings per share; net interest margins; net interest income; noninterest income, including service charge income, mortgage lending income, trust income, net FDIC loss share accretion income, other income from loss share and purchased non-covered loans and gains on sales of foreclosed assets, including foreclosed assets covered by FDIC loss share agreements; non-interest expense; our efficiency ratio, including our goals for 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 goals for traditional mergers and acquisitions and making additional FDIC-assisted acquisitions; other opportunities to profitably deploy capital and our goal of improving on our first quarter earnings in each succeeding quarter of 2013. 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.

[George G. Gleason:]

Good morning. Thank you for joining today's call. We are very pleased to report excellent first quarter results. While our results reflect some of the headwinds typically encountered during the first quarter, our excellent net interest margin, superb asset quality, near-record mortgage lending income and good control of non-interest expenses provided a great start for 2013. We have lots to talk about today, so let's get to the details. Net interest income is traditionally our largest source of revenue and is a function of both the volume of average earning assets and net interest margin. Of course, loans and leases comprise the majority of our earning assets. In the quarter just ended, our loans and leases, excluding covered loans and purchased non-covered loans, grew $42 million. The first quarter is traditionally a period of relatively slow growth for loans and leases. So notwithstanding modest first quarter growth, we still expect to achieve our full year targets for loan and lease growth. Let me give you a little color on that. The $42 million in this year's first quarter compares to last year's first quarter 2012 of $8 million, and in the first quarter of 2011, our loan and lease portfolio actually shrunk $49 million. Of course, we had growth in 2011, notwithstanding a $49 million first quarter shrinkage. We had $235 million growth in 2012, notwithstanding only $8 million of first quarter growth. So suffice it to say, we expected our first quarter growth might follow that seasonal trend and be relatively modest as it was, and that does not diminish our expectations at all for our full year result. Our significant unfunded balance of closed loans, which more than doubled from $313 million at year-end 2011 to $769 million at year-end 2012, increased another $20 million to $789 million in the quarter just ended. While some portion of this unfunded balance will not ultimately be advanced, we expect that the vast majority will be advanced and this significant unfunded balance has favorable implications for future growth in loans and leases outstanding. Because we're getting so much cash equity in so many of our loans, many loans closed in 2012 and during the first quarter of 2013 have had only minimal amounts funded to-date. This unfunded balance of closed loans, coupled with the excellent top line of loan requests on which we are currently working, suggest to us that we will achieve our goal of a minimum of $360 million of net growth in loans and leases, excluding covered loans and other purchased non-covered loans in 2013 and a minimum of $480 million of net growth in 2014. Of course, this guidance for both years excludes growth in loans and leases from our pending acquisition and from any future acquisitions. Despite the intensely-competitive environment, we are finding a number of opportunities for good quality, good yielding loans. Because our lending teams are maintaining sound pricing and credit discipline and getting so much cash equity in most new loans, I believe that the loans that we are now originating are among the highest-quality loans we have originated in my 34 years as CEO. In regard to net interest margin, in the January conference call, we stated that we expected our net interest margin for each quarter of 2013 to be somewhere between 5.84% and 5.60%. Our 5.83% net interest margin in the quarter just ended was near the top of that range. We continue to believe that this 5.84% to 5.60% guidance range is appropriate for the remaining quarters of 2013. This guidance is based on the assumption that we achieve only our minimum target of $360 million of net growth in loans and leases, excluding covered loans and other purchased non-covered loans. As we stated in January, if we exceed that minimum loan and lease growth target, we would expect a slightly lower net interest margin. For example, as we said in January, if we achieve another $120 million in net growth in loans and leases excluding covered loans and other purchased non-covered loans, over and above our minimum guidance of $360 million, we would expect our quarterly net interest margin for the remaining quarters of 2013 to range between 5.80% and 5.55%. As you can see, $120 million of additional growth, which we believe is a possibility, would correlate with a roughly 5 basis point additional margin compression over the year. Of course, this guidance ignores the impact of pending acquisitions -- our pending acquisition and any additional future acquisitions. Other significant changes in the mix of our balance sheet could also affect our net interest margin. In recent years, our net interest margin has been among the best in the industry and is truly the results of a team effort. Our deposit team has very effectively improved the mix of our deposits and steadily reduced our average cost of interest-bearing deposits. During the quarter just ended, they achieved another 5 basis point reduction in our cost of interest-bearing deposits from 31 basis points in the fourth quarter of 2012 to 26 basis points in the quarter just ended. We expect our deposit team will achieve some modest further improvements in our average cost of interest-bearing deposits over the remainder of the year. On the other side of the balance sheet, our lending and leasing teams have continued to achieve good pricing despite an intensely competitive environment. In the quarter just ended, the yield on our loans and leases, excluding covered loans and other purchased non-covered loans, was 5.70%, giving us an enviable 5.44% spread between our yield on such legacy loans and leases, and our average cost of interest-bearing deposits. Let's shift to non-interest income. Income from deposit account service charges is traditionally our largest source of non-interest income. In most years, the first quarter has historically provided our lowest quarterly level of service charge income due to seasonal factors. Service charge income for the quarter just ended increased 0.006% compared to the first quarter of 2012 but consistent with our normal seasonal pattern, decreased 1.6% compared to the fourth quarter of 2012. Mortgage lending income in the quarter just ended was our second best quarter ever and increased 58.1% compared to the first quarter of 2012 and increased 17.4% compared to the fourth quarter of 2012. These strong results reflect a combination of factors, including a high level of refinancing resulting from the near-record low mortgage rates, the expansion of our mortgage lending team over the last year and improvement in housing market conditions in many of our markets. Trust income for the quarter just ended increased 14.1% compared to the first quarter of 2012 but decreased 4.8% compared to our record fourth quarter 2012 results. We continue to focus on growing our customer base and expanding this line of business. Net gains from sales of other assets were $1.97 million in the quarter just ended compared to $1.56 million for the first quarter of 2012 and $2.43 million for the fourth quarter of 2012. The net gains on sales of other assets in these periods were primarily attributable to gains on sales of foreclosed assets, covered by loss share agreements, which we refer to as covered OREO. 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 initially utilizing a 5% per annum discount rate. The net discount amounts are then accreted into income over the relevant time periods. In the quarter just ended, the resulting net accretion income was $2.4 million, up slightly from $2.3 million in the first quarter of 2012 and up significantly from $1.3 million in the fourth quarter of 2012. Let me explain that. On 2 of our acquired banks, we are collecting our FDIC receivable much faster than previously projected. As a result in the quarter just ended, we recalibrated our estimated accretion for both the first quarter of this year and future quarters to account for this faster-than-expected collection rate. This adjustment had a favorable effect on net accretion income in the quarter just ended and should have favorable implications for net accretion income in future quarters. Of course, we still expect that the quarterly amount of net accretion income will diminish over time as loss share winds down and the receivable is collected. Additionally, the amount of net accretion income in future quarters may be adjusted up or down if we further revise our estimates related to collection of the receivable. In addition, non-interest income in the quarter just ended included other income from loss share and purchased non-covered loans of $2.2 million compared to $2.0 million in the first quarter of 2012 and $3.2 million in the fourth quarter of 2012. This line item includes certain miscellaneous debits and credits related to accounting for loss share assets and purchased non-covered assets and loans, but it consists primarily of income recognized when we collect more money from covered loans and purchased non-covered loans than we expected that we would collect. We refer to these additional sums collected as recovery income. Since we tend to be conservative in the way we value covered assets and purchased non-covered loans, which is appropriate given the uncertainty surrounding many of those assets, it is likely that we will continue to see this income item as a meaningful source of non-interest income for many quarters to come. Because it can be significantly impacted by loan prepayments, other income from loss share loans and purchased non-covered loans will vary from quarter-to-quarter as we have seen. You will note from our press release that we had $2.0 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 $2.0 million of gains on sales of other assets, mostly covered OREO during the quarter, and our $2.2 million of other income from loss share and purchased non-covered loans during the quarter, mostly recovery income related to covered loans, you can see the overall conservatism with which we have valued these acquired portfolios. We are continuing to pursue additional FDIC-assisted acquisitions, and we continue to maintain our discipline in pricing and goals for profitability, both in the short term and the long term for any of these transactions. Given the pricing discipline we are maintaining, it is hard to handicap our prospects for making additional FDIC-assisted acquisitions. Even if we don't make additional FDIC-assisted acquisitions, we believe that our organic loan and lease growth will be sufficient to support positive earnings momentum as evidenced by our loan and lease growth over the last 4 quarters. Of course, loan growth from any future FDIC-assisted acquisitions or live bank acquisitions would be icing on the cake. Let's turn to non-interest expense for the first quarter of 2013, which, for the first time, included the operating expenses of our newly-acquired operation in Geneva, Alabama, which was acquired at the close of business on December 31, 2012. The operating expenses for this office are currently much higher than we would like, but we expect these operating expenses to decrease significantly in the third quarter of this year after completion of the systems conversions on May 17. Despite the fact that our efficiency ratio is much better than the industry average, our level of non-interest expense continues to reflect what we consider to be an elevated level of operating cost at many of our offices acquired in the past 3 years. Other than our most recently acquired office in Geneva, Alabama, all of our other acquired offices are fully integrated and operating efficiently. But at these acquired offices, we continue to have elevated costs associated with the high volume of special assets acquired in our FDIC-assisted acquisitions. We are making great progress working through these portfolios. And as we complete that process, we expect our non-interest expense in these offices to reach a more normal level. This, along with other factors, suggests that there may be some room to decrease non-interest expense from the level achieved in the quarter just ended, excluding the effect of our pending and any additional future acquisitions. But as we've said in recent conference calls, we believe that the more significant goal now is to improve our efficiency ratio by growing our balance sheet significantly and thereby increasing revenue. One of the untapped assets of our company is the tremendous growth capacity inherent in our existing branch network. We've talked about this quite a lot. One of our key goals is to tap this growth capacity over time and get back to a sub-40% efficiency ratio over the next 2 or 3 years. If we can fully utilize the capacity inherent within our existing branch network over a longer period of time, we believe that we have the potential to achieve our ultimate efficiency goal of a sub-30% efficiency ratio, although the timing and likelihood of achieving that goal is less predictable. We are continuing to grow and expand. Last month, we opened a new full-service banking office in Charlotte, North Carolina, replacing our long-time loan production office there. We are moving forward with construction of a new full-service banking office in nearby Cornelius, North Carolina, which is expected to open in the first quarter of 2014. We are presently developing 2 new banking offices in Bradenton, Florida with scheduled openings in the third quarter of 2013 and the first quarter of 2014. One of these offices will replace a current leased facility, which we will be vacating in Bradenton, and the other office will be an addition to our branch network there. We recently acquired a site in Savannah, Georgia and are beginning development of a new banking office, which is expected to open in late 2013 or early 2014 to replace our current leased facility there. On January 24, we entered into a definitive agreement and plan of merger with the First National Bank of Shelby in Shelby, North Carolina. First National Bank of Shelby has a rich heritage dating back to 1874 and operates 14 North Carolina banking offices in a 4 county area west of Charlotte. We have been operating in nearby Charlotte for over a decade, giving us some good insights into this market. The closing of this transaction, which is subject to customary regulatory approvals and certain other conditions, is expected to be accretive to our book value per common share and tangible book value per common share. The transaction is expected to close in the second or third quarter of 2013 and is expected to be accretive to our diluted earnings per common share for the first 12 months after closing and thereafter. We continue to be active in identifying and analyzing M&A opportunities, and we believe this to be an important part of our business going forward. One of our long-standing and key goals is to maintain good asset quality. Economic conditions in recent years have made traditional -- 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 a number of our key asset quality ratios in the quarter just ended. Our annualized net charge-off ratio for non-covered loans and leases improved to 19 basis points for the first quarter of this year compared to 44 basis points for the first quarter of last year and 30 basis points for all of last year. At March 31, 2013, excluding covered loans and purchased non-covered loans, our ratio of nonperforming loans and leases to total loans and leases was 0.40%, which was 3 basis points better than our 0.43% ratio as of December 31, 2012. This was our best ratio of nonperforming loans and leases since the fourth quarter of 2007. At March 31, 2013, excluding covered loans, purchased non-covered loans and foreclosed assets covered by loss share, our ratio of nonperforming assets as a percent of total assets was 0.50%, which was a 7 basis point improvement from 0.57% as of December 31, 2012. This was our best ratio of nonperforming assets since the fourth quarter of 2007. Excluding covered loans and purchased non-covered loans, our ratio of loans and leases past due 30 days or more, including past due nonaccrual loans and leases, was 56 basis points at March 31, 2013, which was a 17 basis point improvement from 73 basis points as of December 31, 2012. This was our best quarter and past due ratio since the third quarter of 2007. Obviously, we have continued to see significant improvement in most of our asset quality ratios, and these results that we have mentioned are superb. In our January conference call, we stated that we expected to see further improvement in 2013 in a number of our asset quality ratios, including further reductions in our overall 2012 net charge-off ratio of 0.46% -- let me say that again, 0.46%, and our overall 2012 net charge-offs of $12.2 million. Our first quarter results were consistent with that guidance given in the January conference call, and we reiterate that guidance. 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 first quarter, pushing our ratio of common equity to assets up to 13.25%, and our ratio of tangible common equity to tangible assets to 13.0%. We believe that we will have numerous opportunities over the next several years to profitably deploy our accumulated capital, and that the most immediate capital deployment opportunity we foresee is growth in our legacy loan and lease portfolio. A second opportunity relates to traditional M&A activity, an area on which we have certainly increased our focus. The third opportunity for capital deployment is additional FDIC-assisted acquisitions. 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 with its net income of $20.0 million has provided an excellent start to the year. Our goal, which we believe is a reasonable goal, is to improve on our first quarter earnings in each succeeding quarter of 2013. That concludes our prepared remarks. At this time, we will entertain questions. Let me ask our operator, Janine, to once again remind our listeners how to queue in for questions. Janine?

[Operator:]

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

[Michael Rose:]

First question relates to the growth in funded balances of closed loans, the $20 million increase. It's clearly been a little bit slower than it has been over the past couple of quarters, which has been exceptionally strong. But I wanted to get a sense of -- is that more of a timing issue where the growth just didn't translate into the quarter, or are you seeing a real slowdown or any sense of slowdown from some of your customers?

[George G. Gleason:]

No, I would not say we're seeing any sense of slowdown. I would acknowledge as we have in a number of recent calls that we're operating in a very intensely-competitive environment, but we're not seeing a slowdown at all in the number of transactions we're looking at. In fact, if anything, that's accelerating. Greg McKinney was talking about it a few days ago when we were working on the script, and he said, "The first quarter is a really good quarter for a first quarter, but it wouldn't be good if it was the second quarter, third quarter or fourth quarter." And we really believe that our $42 million of non-loss share, non-purchased loan growth in Q1 is a really good first quarter number. And as I've said in my prepared remarks, that compares to less than $8 million of growth in the first quarter of last year. So we're 5 plus, almost 6x the growth, 5x to 6x the growth we had in the first quarter of last year. And in the first quarters of 2009, 2010 and 2011, we had negative loan growth in every one of those years in the first quarter. So there is a seasonal factor, and we've talked about this a lot in previous years at this time to our loan growth. So we think it was a good first quarter. Certainly wouldn't be happy with those numbers in Q2, Q3 or Q4, and we certainly expect those quarterly results will be much better. But yes, we thought it was a good first quarter.

[Michael Rose:]

Okay. And then is the majority of the growth or portion of the growth still coming from construction and the Real Estate Specialties Group?

[George G. Gleason:]

The Real Estate Specialties Group is contributing the largest share of the growth. Our CRE portfolio last quarter went up $16 million. Although that actually held steady in percentage terms at 38.2% of our loan book, that went from $808 million to $824 million basically. The construction and development book went from $579 million to $623 million, so what is that? A $44 million growth there. And went from 27.3% of our outstanding loans to 28.9%. And that should not be surprising to anyone since obviously, these massive amounts of closed but unfunded loans that we've been talking about for many quarters, and you see that number growing from quarter-to-quarter, those are construction and development loans, so it should not be surprising at all that that's a large part of our growth.

[Michael Rose:]

Okay. And then one final question, if I could. As it relates to the Shelby acquisition and with the purchase accounting adjustments, how do you think that will impact the margin?

[George G. Gleason:]

Michael, I don't know the answer to that question. We will value those loans in the week preceding the closing of the acquisition. We will do as we've done on all 8 of our previous acquisitions, deploy a large team of folks who will sit down and who will put a final closing date valuation on every loan. We will discount those loans as -- to a net present value as purchase accounting requires. And depending on that final valuation, that will determine where that yield on that portfolio comes in. So my guess is that it's not dilutive at all to our margin and most likely would be accretive to our margin. But we won't really know that until we do that final valuation the week before closing.

[Operator:]

[Operator Instructions] We'll hear next from Matt Olney with Stephens Inc.

[Matt Olney:]

George, is there any more color you can provide for us on the Shelby acquisition? And specifically, I think you said in your prepared remarks the closing date would be 2Q or 3Q. Can you give us any color as to the swing factor on that?

[George G. Gleason:]

Our -- I think we have 2 of our 3 regulatory approvals. We are scheduled to appear before the Arkansas State Bank Department at their meeting where this is expected to be approved here, Greg, in a week or 2, next week. So the regulatory approval process is going all along as expected. We filed our S-4 registration statement with the SEC on the transaction. They have that. They are reviewing that now. We expect either a comment letter or a no comment letter from them probably within the next week or so, week to 2. And depending on whether they have comments or no comments and how long it takes us to respond to their comments will basically -- I would anticipate drive, whether it's a late June or July closing. And of course, one can never predict these things precisely, but we think it's probably a late June or early July transaction.

[Matt Olney:]

And that's helpful, George. And then secondly, as a follow-up, thinking about M&A. In the previous calls, you've talked about your M&A appetite and how you believe the company's strategy includes all different kinds of banks, whether it's stressed or not stressed, different sizes, different geographies. Now that you're a little bit further along in the cycle, can you give us any more color as to which types of banks you expect to have the most success with over the next few quarters and maybe the banks you're talking with the most today?

[George G. Gleason:]

I really can't give you any more color on it. What we've said in our previous commentary on that is still accurate. We're looking at a broad spectrum from very healthy institutions to distressed institutions that aren't going to fail but are under significant distress and really all points in between across a broad spectrum of geographies and a broad spectrum of sizes. So we're looking at a lot of opportunities and looking for opportunities where we can accomplish a transaction that will be beneficial to our shareholders and yet beneficial to the institution with which we would be joining. I will add on that, Matt, that we are continuing to be very active and have due diligence teams in the field every few weeks on both FDIC and live bank transactions. So we're working by looking at a lot of opportunities.

[Operator:]

And we'll hear next from Jennifer Demba with SunTrust.

[Jennifer H. Demba:]

I was just curious, you mentioned earlier that you feel like your expenses are rather inflated at the acquired branches of the failed banks that you absorbed. Can you quantify at all how much leverage you think you have over time at those offices? Or give us any more color?

[George G. Gleason:]

I would say we're spending several hundred thousand dollars, $200,000-plus a month in our share, the non-loss share part of the loan collection and other sorts of expenses. And then the bigger issue is just the -- in addition to a couple of hundred thousand dollars a month in our part of loan collection and repo expenses is the significant staffing resources allocated to working those assets. And that goes all the way from special assets personnel that are dealing with them in OREO, managers that are working to maintain and liquidate those OREO properties to staffing and our office of General Counsel that's overseeing all that. So we -- it's hard to get precise because there are so many points at which that touches our company, and it includes even folks in corporate finance that are doing the accounting for all this that's fairly involved. So as we diminish those assets, there will be costs that will be able to be either taken out or redeployed to more productive means all across the spectrum of the company. So I think there's noticeable efficiency gains that can be accomplished as we whittle down those pools of problem assets. And we're making -- you can see that in the numbers. We're making great progress in that every quarter. And the more of that we get done, the more of those resources we can either redeploy or remove from our cost structure.

[Operator:]

And we'll hear next from Peyton Green with Sterne Agee.

[Peyton N. Green:]

Yes, a question on just the overall growth capacity that you think you have in the acquired branches, particularly the FDIC-assisted ones. When would you expect those to start growing organically in a fashion that you used to grow when you de novo-ed? I mean, is that still a couple of years out or are you starting to see progress there?

[George G. Gleason:]

Well, we're seeing some progress there. The -- for several quarters, for example, last 3 quarters, our Georgia offices, excluding loss share loans, have accounted for basically 1.8% to 1.9% of our total loan portfolio. So we're getting some -- a little bit of traction there. And as I'm looking at South Carolina and Alabama, those markets, South Carolina was up 2 basis points; Alabama was up 12 basis points last quarter from the prior quarter. So we're beginning to see some tiny positive advances in those offices, Peyton, but there's still a lot of defense being played in those offices that's consuming a lot of manpower. And there are still stressed conditions in those markets that are limiting the number of opportunities that are available. But I can tell you in talking with lenders and looking at the loan flow in those offices, that it is getting better every quarter. It's getting better at a very slow rate. I don't want to oversell that. But those offices will all or mostly, maybe not all of them, but most of those offices will become positive contributors to our loan growth over time. It's going to be a slow process to get there, and we're working there but doing so very carefully.

[Peyton N. Green:]

Okay. And then do you have a conversion date for First National Shelby yet?

[George G. Gleason:]

We do not, and we're trying to set that. We're dribbling the ball on that a little bit, just trying to get a more definite timetable based on the process of getting our S-4 effective through the SEC. So our guess right now is probably a September or October conversion date, but that is a guess.

[Operator:]

And we'll hear next from Blair Brantley with BB&T Capital Markets.

[Blair C. Brantley:]

I had a question on the Shelby acquisition. Have you given any guidance as to what you think is kind of the right size for that franchise versus kind of where they were when the deal was announced?

[George G. Gleason:]

We haven't, and the folks at First National Shelby have already made some adjustments in their balance sheet with our recommendations and concurrence. They've made some adjustments in their balance sheet and sold some securities and made some other adjustments that paid down some borrowings that had a really high cost of them and so forth. So they're taking steps already to get their balance sheet in a more -- what we think is a more appropriate position. So we have not given any indication on that. I will say this, I think of all of the acquisitions that we've done or will do when we have that one accomplished, that, that market is the most opportune market for growth of any of the acquisitions we've done -- certainly, a much healthier market by and large than the markets, a lot of the markets where we bought failed banks in Georgia and a much growthier, more vibrant market than the market we're in, in Geneva, Alabama. So we think it will be a franchise that has more, much more growth opportunities and much more immediate results. And I'm not saying we're going to come out of the box growing the portfolio in Q1 or Q2, but we'll grow more there, I think, faster than we have been able to do in the previous 8 acquisitions.

[Blair C. Brantley:]

Okay. A follow-up, has there been any change to your cost savings or your revenue enhancement kind of internal goals, given some of the actions that have been taken to date for them?

[George G. Gleason:]

There really have not been. The actions that have been taken locally there to date by the existing management of the First National Bank of Shelby are all -- been very consistent with things we would have done. And they're doing them on their own because as we talk about things, they're concluding in a lot of issue -- instances they're initiating those actions even without our advice because they're wanting to constantly improve their results and balance sheet. So no real changes in our expectations on that since the announcement of the acquisition.

[Blair C. Brantley:]

Okay. And then one last question. In terms of pay downs, did you see any change in trend this quarter? Is it different from what your expectations were from the legacy loan book?

[George G. Gleason:]

Not really, no. We knew we would have a fairly significant pay down volume in Q1, and that pay down volume occurred very much as expected and predicted.

[Operator:]

And we'll hear next from Brian Martin from FIG Partners.

[Brian Joseph Martin:]

George, just on the last question maybe on the pay downs, what was the absolute level of pay downs this quarter versus last quarter? Was it similar in absolute terms or was it less?

[George G. Gleason:]

Brian, I don't have that. I know how it compared to our results. I know the large things that we were expecting to pay down in Q1 and so forth, and they all fell in place pretty much as expected. So I don't have those numbers and haven't compared them quarter-to-quarter, I'm sorry.

[Brian Joseph Martin:]

Okay. And then just one other thing. On the recalibration you talked about with regard to kind of the accretive loss share receivable, can you give some color as to what -- you said it was 2 banks in particular, kind of what was happening there and just kind of how to think about it? I mean, was that something kind of an annual review on those 2 banks and you have to do it for the other banks? Or how do we think about that and just kind of give a little bit more color on that, it would be helpful.

[George G. Gleason:]

We're reviewing all these things pretty much continuously and really, at least quarterly for every bank. As we did -- we basically look at the -- our starting point in the review is to look at the collections versus what we expected and to also look at the total marks on the loans versus the FDIC receivable. And on our [indiscernible] First Choice portfolios, those total the FDIC receivable as a percentage of our total marks on the loans and we've got 80% loss share, those numbers had drifted down lower instead of approaching 80% over time through accretion. Those numbers were actually drifting down lower. And Greg, I think we've gotten into the 40s or low 50s.

[Greg McKinney:]

Sure, the 50s.

[George G. Gleason:]

Yes, I think one or both of them are in the 40s or 50 percentage-wise. And that -- they were going the opposite way that you would expect based on the accretion of that receivable. And as we -- because they were -- we were tracking that and sometimes that happens from quarter-to-quarter and then corrects the next quarter, and you don't need to make an adjustment to it. But this has been a fairly consistent trend that, that percentage was falling at those banks. It's just because we're collecting the receivable there so much faster than we had modeled. The effect is -- we need to -- we've got more discount that we need to accrete faster. So we basically went in and, I think, kind of reset the accretion from January 1 going forward based over 12 or 14 quarters. I don't remember what exactly what it was -- 14, over 14 quarters. So the effect you saw in that in Q1 is not the cumulative effect of why we've got to speed up the accretion and to get back online. We didn't do it all in one quarter. We recalibrated the accretion that we'll be taking this quarter in or first quarter and future quarters and worked out that adjustment to the accretion over a 14-quarterly period. I've been telling you guys for a long time, we've been very conservative in the way we've handled these transactions. And we've always been mindful of the fact that these things are sort of messy transactions, and there's a lot of estimation involved. And we've tried to be very conservative in our estimates so that when we had adjustments in future periods like we did in Q1 and we'll have going forward as a result of that, that they tend to be positive adjustments and not negative adjustments. So if you look at that 2 -- if you look at the quarterly accretion number in that little 8-quarter supplemental quarterly financial data that we attached to the press release, you'll see our $2.4 million of accretion in Q1 of '13 is $100,000 more, basically $87,000 more than our Q1 '12 accretion. And if you sort of look what happened to accretion over '12, that would probably be a good sort of starting point indicator of what we would think accretion would look like in '13. Because we have reset those 2 banks' accretion over what now will be 13 remaining quarters, 14 quarters including last quarter, so it's not a onetime adjustment. It will reset that number and sort of set a new trajectory for the next several years on that number. Does that help?

[Brian Hagler:]

Yes, absolutely. And are the other banks you've done deals on, are they -- you said that -- I guess, are they close to -- been close to them being resetting? Or I guess, they're probably a ways off before something would happen on those fronts, I guess, is if you didn't do anything this quarter?

[George G. Gleason:]

We've made periodic adjustments in the past, and the initial accretion income we started with was 5%. And you may have seen quarters where our accretion income was 4.5% or our accretion income was 5.5% on the balance of that outstanding. You'll see that percentage move a little bit, and that's because we're constantly tinkering with those adjustments on banks. And we've had a couple of banks, Unity and Horizon, which were #1 and #3. We've had a couple of -- we had a period on both those where we were collecting that receivable slower than we projected, so we slowed down their accretion. At the same time, we had a couple of other banks that we were collecting faster then, and we speeded up their accretion. And we're trying to keep this thing very much on track to have that accretion reach 0 when the receivable reaches 0 and do it in an orderly manner. So there is an ongoing adjustment, and you don't see some of that flow through the numbers because we may have -- in one quarter, we may have one bank where we slow down their accretion for that quarter to make an adjustment and another bank where we speed up that accretion. But this was a very noticeable deal related to the Park Avenue and First Choice adjustments because over the last several quarters, we've really been resolving a lot of their problem assets, collecting a lot of the receivable. And the speed that, that happened over several quarters, we kept thinking, well, that's going to go the other way next quarter and we're not going to adjust it now. And it's just the trend has just continued to accelerate, so it required a real significant recalibration on those 2.

[Brian Joseph Martin:]

Okay, perfect. And just the last question [indiscernible]. What gives you the confidence on the loan growth prospectively that you can reach the $360 million or potentially that $480 million in organic growth based on -- maybe can you just talk about your current pipeline, where it is now maybe versus last quarter or last year? But just something, I guess, why you're still expecting such strong growth when you have Jamie Dimon obviously talking a little bit about loan pressure prospectively in some of their comments. And I know they're a different animal than you guys, but just a little color would be helpful there. And that's all I have.

[George G. Gleason:]

Well, I really don't know what else I can say beyond what I have said. We've talked about the historical seasonality of the first quarter. And I would suspect that last year when we reported $7.9 million or just under $8 million of first quarter loan growth, there wasn't anyone that probably thought we would make our $240 million guidance last year. And we didn't but $235 million was close to $240 million. And I think we'll see a very similar pattern this year of accelerating growth in the later quarters of the year. Based on the pipeline we're looking at, the closed and unfunded loans that we've got on our books, our models and loan-by-loan projections of pay downs, we think that $360 million is a minimum growth number for 2013.

[Operator:]

And we'll take our next question from David Bishop [ph] with MLV & Co.

[Unknown Analyst:]

Sort of following up on Brian's question, are you seeing any change in the composition when you are out competing for the new loan volume, especially in the Real Estate Specialties Group? Any sort of change in the tenor of competition and who you're sort of bidding up against? I know it varies market to market in terms of competition. But any REIT structures, insurance companies, any sort of change on the overall competitive environment?

[George G. Gleason:]

Dave, let me -- I would say no, not really. I mean, there's a constant shifting and evolution of what goes on, and that is normal. You find a sector of business where you can find really good opportunities and competitors figure that out after a while, and they're competing with you on that type of product and that market and so forth. And I mean, that's just a constant evolution of our business. We're constantly looking at a broad spectrum of opportunities and trying to find those areas where we can get disproportionately good quality with disproportionately good yields and lower-than-normal risk. So nothing has really changed in that regard. It is a constantly moving, very dynamic effort to grow the portfolio in a quality, good yielding way.

[Unknown Analyst:]

And then maybe from an internal perspective, has there been any sort of change in terms of sort of the house limits, in terms of the size of loans you'd contemplate portfoling?

[George G. Gleason:]

No, no. There's a great temptation to do that because if you're standing at $45 million, you can look up and you can see things at $60 million that look very enticing. Or if you're staying at $60 million, you can look up and see things at $80 million that look very enticing. But no, we've not -- we've resisted that temptation.

[Operator:]

And at this time we do have one question remaining in the queue. [Operator Instructions] And we'll take our next question from Peyton Green.

[Peyton N. Green:]

Yes, George, just to follow up on the other loss share income in the OREO gains. In the past, you've mentioned that those lines -- I mean, does the accretion of the receivable change your outlook for the direction of those lines going forward?

[George G. Gleason:]

No, not at all. They're totally independent. And if you look at both of those line items, both of them were up versus the first quarter of last year. They were down versus the fourth quarter of last year. And I don't ascribe any trend to that. I think it reflects a couple of things. Number one, it reflects the fact that both of those line items are heavily dependent upon prepayment and sales activity, which tends to vary a lot from quarter-to-quarter. And there's a seasonal impact there, too. The first quarter of the year is not as good a real estate sales season typically in most of the markets we're in as the second or the third quarter or the fourth quarter. Really, I guess, the second and fourth quarters are probably the best quarters of selling activity in most of our markets. And that sales activity not only drives the sales line item, but it only tends to affect somewhat the prepayments that tend to impact recovery income as well. So I thought it was a very good first quarter result on both line items. We were up nicely from last year. I didn't put any significance on the fact that both line items were down from Q4. It's just -- that number is just going to bounce around. For the whole year of 2013, I think I've said publicly before that we would expect those line items for the whole year of 2013 to be very similar to those line items for the whole year of 2012 on an average basis from quarter-to-quarter. But they'll bounce around all over the place within the quarters. So one needs to not get too exercised about variation from quarter-to-quarter because that's just the nature of those line items.

[Peyton N. Green:]

Sure. And then I guess with the economies gradually getting better, does that do anything to the philosophy, I mean being able to get out of credits a little sooner than you think, which might help income? And then also, is the pricing expectation starting to move up and you're actually to get out of some of these things in better shape?

[George G. Gleason:]

We are -- I would say yes on both of those. Yes, a better economy creates more real estate sales, which lets you move things more quickly. And hopefully, a better economy also helps you move things at a better price. I do think the economy is better. I think it's only slightly better, but we are seeing the impact of that in the volume of sales and in a number of cases in the pricing of sales. So I think that is positive for us.

[Peyton N. Green:]

Okay. And then unrelated, but on the purchase loans, on the Genala loans, was there anything that influenced the yield beyond the fair value mark in the first quarter -- collections of impaired loans or anything like that?

[George G. Gleason:]

Pay downs -- we did have some pay downs in there. And as you're prone to do in a new acquisition, you lose a few pieces of business and have some stuff pay down. And then they had some problem loans, and this is going to be one of the more interesting dynamics. It's a tiny little portfolio, but they had some problem loans. And their previous collection efforts on those had not been really focused and as diligent as we would require in our world of collecting those. So we did have a few loans, and these are small, small parts of our balance sheet obviously. But we did have some loans we collected that had some modest credit marks on them, some decent credit marks on them relative to the small size of the loan -- decent credit marks that just -- they were collectable and they just needed some work. And we're going to see that for several more quarters to come, I think. So that will be [indiscernible] out of that portfolio, if we can continue that.

[Operator:]

[Operator Instructions] And it appears we have no further questions for you at this time.

[George G. Gleason:]

Thank you. There being no questions, that concludes our call. Thank you so much for joining us today. We look forward to talking with you in about 91 days. Thank you.

[Operator:]

And again, this does conclude the Bank of the Ozarks, Inc. First Earnings Release Conference Call. Thank you again for your participation.