Q1 2012 BANK OF THE OZARKS INC Earnings Conference Call
Apr 13, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
OZRK - Bank of The Ozarks Inc
Q1 2012 BANK OF THE OZARKS INC Earnings Conference Call
Apr 13, 2012 / 03:00PM GMT
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Corporate Participants
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* Susan Blair
Bank of the Ozarks, Inc. - Chairman and CEO
* George Gleason
Bank of the Ozarks, Inc.
* Greg McKinney
Bank of the Ozarks, Inc. - CFO, EVP, Chief Accounting Officer, Controller
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Conference Call Participants
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* Michael Rose
Raymond James & Associates - Analyst
* David Bishop
Stifel Nicolaus - Analyst
* Matt Olney
Stephens Inc. - Analyst
* Kevin Reynolds
Wunderlich Securities, Inc. - Analyst
* Derek Hewett
Keefe, Bruyette & Woods - Analyst
* Jeff Bernstein
AH Lisanti Capital - Analyst
* Brian Martin
FIG Partners - Analyst
* Peyton Green
Sterne, Agee & Leach, Inc. - Analyst
* Joe Fenech
Sandler O'Neill & Partners - Analyst
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Presentation
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Operator [1]
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Welcome to the Bank of the Ozarks Inc. first-quarter earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Susan Blair. Please go ahead.
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Susan Blair, Bank of the Ozarks, Inc. - Chairman and CEO [2]
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Good morning. I'm Susan Blair, Executive Vice President in charge of Investor Relations. The purpose of this call is (technical difficulty) Company's results for the quarter just ended and our outlook for upcoming quarters. Our goal is to make this call as useful as possible in understanding our recent operating results and future 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 statement about economics, real estate market, competitive credit market and interest-rate conditions, revenue growth, net income and earnings per share, net interest margin and potential for further improvement in our cost of interest-bearing deposits, net interest income, non-interest income (technical difficulty) service charge income, mortgage lending income, trust income, net FDIC loss share accretion income, other lost share income and gains on sales of the foreclosed assets, including foreclosed assets covered (technical difficulty) loss share agreement, noninterest expense, our efficiency ratio, asset quality and our various asset quality ratios, our expectations for provision expense for loan and lease losses, charge-offs and our net charge-off ratios for both noncovered loans and leases and covered loans; our allowance for loan, lease and deposit growth, including growth in our legacy loan and lease portfolio through 2014 and growth from unfunded close loans, changes in the value and volume our securities portfolio; the opening and relocating of banking offices; our goal of making additional FDIC-assisted failed bank acquisitions and other opportunities to profitably deploy capital. You should understand that our actual results may differ materially from those projected in the forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call.
For a list of certain risks associated with our business, you should 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.
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George Gleason, Bank of the Ozarks, Inc. [3]
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Good morning and thanks for joining today's call. Our first quarter results are an excellent start for 2012. Our solid first-quarter earnings and significant improvement in asset quality ratios are a result of hard work and meaningful contributions from team members throughout our Company. We've got a lot to talk about today, so let's get to it.
Net interest income is traditionally our largest source of revenue, increased 21.5% in the quarter just ended compared to the first quarter of last year. But it decreased 4.4% compared to the fourth quarter of last year. Of course, net interest income is a function of both net interest margin and the volume of average earning assets. In the quarter just ended, both our net interest margin and volume of average earnings assets increased significantly compared to the first quarter of 2011. Specifically, in this year's first quarter compared to last year's first quarter, net interest margin increased 37 basis points and average earning assets increased 11.9%. On the other hand, in the quarter just ended, net interest margin decreased 7 basis points and average earning assets declined 1.4% compared to (technical difficulty) quarter of last year.
In our January conference call, we stated that we expected our net interest margin would fluctuate over the course of 2012 in a range of from 6.05% down to 5.80%. Our 5.98% net interest margin in the quarter just ended was within the upper one-third of that guidance range. We continue to believe that the 6.05% to 5.80% guidance range is appropriate for the remaining quarters of 2012.
Our first-quarter net interest margin of 5.98% is outstanding and is truly the results of a team effort. Our deposit pricing committee has done an excellent job understanding our markets and our competition while focusing on profitability. For example, in the quarter just ended (technical difficulty) reduced our cost of interest-bearing deposits by 4 basis points and they expect to see additional improvements in our cost of interest-bearing deposits in the coming quarters. Our retail banking team has done a great job in adding large numbers of core deposit customers and dramatically improving the mix and profitability of our deposit base in recent years. That mix improved even further in the quarter just ended.
On the other side of the balance sheet, our lending and leasing teams have continued to achieve good pricing on loans and leases in our legacy markets. In the quarter just ended, the yield on our noncovered loans and leases was 6.03%, giving us an enviable 5.55% spread between our yield on noncovered loans and leases and our average cost of interest-bearing deposits. Of course, our teams working on FDIC-assisted acquisitions have given our net interest margin an extra boost, and the excellent yields -- with the excellent yields on our covered loans.
In the quarter just ended, our noncovered loans and leases grew $8 million from the balance at the beginning of the year. Notwithstanding this modest first-quarter growth, we still expect to achieve our full-year growth targets for loan and lease growth. The commitments and contingencies footnote contained on pages 98 and 99 of our recently issued annual report reflects that our outstanding loan commitments almost doubled from $166 million at year end 2010 to $313 million at year end 2011. Since we seldom issue loan commitments, this $147 million increase during 2011 was almost all due to the increased volume of closed loans not yet funded. Because we closed a number of additional loans in the quarter just ended, that commitment amount increased another $78 million to $391 million at March 31. This growing volume of closed loans still to be funded, coupled with the excellent pipeline of loan requests on which we are currently working suggests to us that we will achieve our goal of a minimum of $240 million of growth in noncovered loans and leases in 2012, a minimum of $360 million, or $30 million a month on average in 2013 and $480 million or $40 million per month on average in 2014. We are reiterating today our prior loan growth guidance for all three years.
This growing volume of unfunded loans is due to a couple of factors. First, despite the highly competitive markets, we are finding many opportunities for good quality, good yielding loans. And second, as most of you know, we get a lot of cash equity in most of our transactions. As noted on page 22 of our recent annual report, at December 31 we had weighted average cash equity of 41% in our construction and development loans which had interest reserves. Of course, that included the majority of our construction and development loans. Those of you who have followed this statistic in our periodic reports over the past several years will realize that this cash equity percentage has increased from the high 20% to low 30% range when we first started reporting this number some years ago, up to the current 41% cash equity figure. Getting this much cash equity in transactions tends to make for great asset quality, but it also delays loan funding, since our cash equity is almost always put in first, meaning that we are funding our loans later in the development process.
We have a growth pipeline that is flowing robustly, as evidenced by the $78 million increase in closed but unfunded loans in the first quarter, and we fully expect to see loan and lease growth materialize consistent with our guidance.
Let's shift to noninterest income. Income from deposit account service charges is traditionally our largest source of noninterest income, and historically the first quarter has typically accounted for about 22% of our annual service charge income. In the quarter just ended, service charge income increased 22.3% compared to the first quarter of last year and reflecting normal seasonality was down 4.9% from the fourth quarter of last year. Obviously, our growth in core deposit customers has had and should continue to have favorable implications for income from deposit account service charges.
Mortgage lending income in the quarter just ended was up 61.7% from the first quarter of last year. Typically, our first-quarter mortgage lending income is adversely affected by seasonal factors, but our mortgage lending income in the quarter just ended was down only 4% from the fourth quarter of last year. Our excellent first-quarter mortgage income results likely benefited from the unusually mild weather in a number of our markets, combined with modest improvement in housing market conditions. A number of our markets have seen some increased volume of home purchase activity over the course of the quarter.
Trust income in the quarter just ended was down 1% from the first quarter of last year. We are continuing to see growth in personal trust and employee benefit trust income, but corporate trust income has decreased. Most of our corporate trust income is derived from fees earned for services in connection with new municipal bond issues, and municipal bond issuance has been at very low levels for more than a year.
Net gains from sales of other assets increased to $1.55 million in the quarter just ended compared to $0.41 million in last year's first quarter. Net gains realized in the quarter just ended were primarily attributable to gains on sales of foreclosed assets covered by loss share agreements, which we refer to as covered OREO. When we acquire such foreclosed assets and FDIC-assisted acquisitions, we mark those assets to estimated recovery values and then we discount those estimated recovery values to a net present value utilizing an appropriate discount rate. Unlike covered loans, the net present value discount on our covered OREO is not accreted into income over the expected holding period of the covered OREO. Because of this, we are very likely to see net gains from sales in future quarters for some time to come. This has been evident in each of the last seven quarters.
In the quarter just ended, we recorded $2.30 million of income from accretion of our FDIC loss share receivable net of amortization of our FDIC clawback payable. As part of our FDIC-assisted acquisitions, we record a receivable from the FDIC based on expected future loss share payments, and we 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 related clawback payable are discounted to a net present value utilizing a 5% per annum discount rate. The net discount amounts are then accreted into income over the relevant time periods, and in the quarter just ended, the resulting net accretion income was $2.30 million, down slightly from $2.36 million in the immediately preceding quarter. This accretion income will be an ongoing source of income for us as long as we are under the loss share agreements. Of course, the amount of net accretion income will tend to diminish over time as loss share winds down.
In addition, noninterest income in the quarter just ended included other loss share income of $1.98 million. This line item includes certain miscellaneous debits and credits related to the accounting for loss share assets, but it consists primarily of income recognized when we collect more money from covered loans than we expected that we would collect. We refer to the additional sums collected as recovery income. Since we tend to be conservative in the way we value covered assets, which is certainly appropriate, given the uncertainty surrounding many of those assets, it is likely that this other loss share income will continue to be a meaningful income item for many quarters to come. Because it can be significantly impacted by prepayments on covered loans, other loss share income will vary from quarter to quarter.
We believe that our accounting, including valuations for covered assets in connection with all seven of our FDIC-assisted acquisitions, has been appropriately conservative. You can see our conservative philosophy in four line items of our income statement. First, the 8.60% effective yield on our covered loans in the quarter just ended reflects the substantial discount rates we utilize to determine the net present value of covered loans. Second, the significant net accretion income from our FDIC loss share receivable reflects the 5% discount rate we utilize to discount those assets to net present value. Some banks have used to discount rates as low as 2%.
Third, our other loss share income, mostly recovery income as we have previously discussed, reflects the fact that our lending and special assets personnel have done a great job so far in maximizing recovery on covered loans.
And fourth, our gains on sales of other assets, for the reasons previously mentioned, reflect the conservative accounting for covered OREO and the effective work of our staff in selling these assets.
You will note from our press release that we had $1.53 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 estimates of cash flows. However, if you consider that number in the context of our $1.55 million in gains on sales of assets, mostly covered OREO and our $1.98 million of other loss share income, mostly recovery income, you can see the overall conservatism with which we had valued these acquired portfolios.
We continue to be very pleased with the current performance and future prospects of all seven of our FDIC-assisted acquisitions. Although the pace of bank closings has slowed noticeably in recent months, we continue to expect that there may be a couple of hundred more failures over the next two or three years, and we continue to be actively pursuing such transactions.
Let's turn to noninterest expense, which increased 9.2% in the quarter just ended compared to the first quarter of last year. In our last conference call, we noted that with our systems conversions completed and the follow-up training done for all seven of our acquisitions, our noninterest expense in the first quarter of 2012 should reflect a more normal level. Consistent with that guidance, our noninterest expense in the quarter just ended decline for the third consecutive quarter. Excluding any increase in noninterest expense that might result from any additional acquisitions, we expect some further reductions in noninterest expense in the next couple of quarters compared to the quarter just ended.
With that said, we are certainly continuing to grow and expand. For example, in January, on January 3, we opened an expansion office in Austin, Texas for our real estate specialties group. In February we opened our ninth metro Dallas area office in The Colony, Texas. In the third quarter, we expect to open our 10th metro Dallas office in South Lake, Texas, our second office in Mobile, Alabama and an expansion office in Atlanta, Georgia for our real estate specialties group. In the fourth quarter, we expect to relocate our long-standing Charlotte, North Carolina loan production office to a full-service banking office we are building. And we are also working on potential fourth-quarter relocations of our offices in Bluffton, South Carolina and Wilmington, North Carolina from our current leased facilities to new, improved facilities which we hope to acquire.
Obviously, these new offices in Texas and throughout the Southeast reflect the growing importance of Texas to our company And our shifting to a more offensive-minded business strategy in our newer Southeast markets.
One of our long-standing and key goals has been to maintain good asset quality. Economic conditions in recent years have made our traditional strong 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 significant improvement in our asset quality ratios in the quarter just ended. Our annualized net charge-off ratio for non-covered loans and leases was 44 basis points for the quarter for the first quarter of this year compared to 72 basis points for the first quarter of last year and 69 basis points for all of last year.
At March 31, 2012, excluding covered loans and covered foreclosed assets, our ratio of nonperforming loans and leases to total loans and leases was 61 basis points, which is a 9-basis-point improvement from year end, and our ratio of nonperforming assets to total assets was 77 basis points, which is a 40-basis-point improvement from year end.
Similarly, excluding covered loans, our ratio of loans and leases past due 30 days or more, including past due nonaccrual loans and leases, was 86 basis points, which is a 70-basis-point improvement from year end.
In our January conference call, we stated that in 2012, we expect to see some further improvement in our net charge-off ratio compared to 2011. But we also stated that we expected provision expense to go up in 2012 because of the strong growth we are projecting in noncovered loans and leases. That guidance continues to reflect our expectations for the full year of 2012. Of course, as we said in January, we don't mind incurring provision expense at a higher level if the increase is due to growth in our portfolio of quality loans and leases.
In recent years, we have 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 11.54% and our ratio of tangible common equity to tangible assets up to 11.26%. 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, which we've seen signs of in each of the last three quarters.
The second most immediate opportunity we foresee is additional FDIC-assisted acquisitions. A third opportunity relates to traditional M&A activity, an area on which we have not traditionally focused but which we think will provide more favorable opportunities for us in the future. And the fourth opportunity will continue to come from whenever interest rate increases occur in a significant way and we consider it timely to reload our investment securities portfolio.
In closing, the quarter just ended with its net income of $18 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 2012.
That concludes my prepared remarks. At this time we went entertain questions. Let me ask our operator to once again remind our listeners how to queue in for questions. Operator?
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Questions and Answers
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Operator [1]
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(Operator instructions) Michael Rose, Raymond James.
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Michael Rose, Raymond James & Associates - Analyst [2]
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My first question relates to the drop in the noncovered loan yield. Just a sense of what you are seeing on pricing -- I assume most of the quarter's growth, although it was somewhat muted this quarter, is coming from Texas. Can you talk about the competitive trends there and where new loan spreads are?
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George Gleason, Bank of the Ozarks, Inc. [3]
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Well, we're seeing very competitive conditions in a lot of our markets, and Little Rock is probably one of the most competitive markets. So we've seen really tough pricing comparisons and banks doing things on credit terms that we would just consider foolish.
So we aren't going after tons of really cheap business. We are not going after anything that we think has gotten overheated on the credit front. But you know, one of the great assets of our Company is the fact that we have such a strong origination platform in our real estate specialties group in Texas. Those guys last year saw $8 billion of loan applications. I think that number will be 25% to 50% higher than that this year, based on what deal flow they are seeing.
We screened that $8 billion and did thorough, comprehensive underwriting on about $2.5 billion to $3 billion of that, and the closings in that office last year were approximately, just rounding off, $320 million. So, basically, those guys closed about 4% of the loans that they looked at last year. I expect that number will be somewhat higher than that this year, just because we continue to refine and improve our processes.
But if you are closing 4% or 5% or 6% or even 7% or 8% of the loans that you -- opportunities you look at, then you are able to screen out all of the loans that don't meet your super-high credit standards and you are able to screen out lots and lots of loans that would be really good credits, but they're just priced too cheap to have an appropriate risk-adjusted reward.
So, because we're seeing so many opportunities, particularly in that office, but in a few other locations as well, we're fairly confident about our ability to continue to get yields on our loan originations that are better than the average bank can get on their loans. And that's why we've given guidance that we think the margin this year, even with the runoff in some of the covered loans and so forth, will range from that 6.05% of the fourth quarter of last year down towards that 5.80% of the third quarter of last year. And the first quarter seems to sort of validate that assumption. So having a little margin compression is not surprising, but it's hard to not be really excited about having a 5.98% margin. That is a world-class margin.
So yes, we're seeing a lot of competition, but we're seeing a lot of volume. And we think that that's going to translate into really good growth over the course of the year without too much erosion in the profit margin.
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Michael Rose, Raymond James & Associates - Analyst [4]
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And George, can you discuss what the core margin is, excluding the accretion and what it was last quarter?
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George Gleason, Bank of the Ozarks, Inc. [5]
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Yes; I gave that in my remarks. If you take our yield on noncovered loans and compare that to our yield on interest-bearing deposits, the spread was 5.55% this quarter, and I think that number was 5.73% last quarter. And that -- I think it was an 18 basis point quarter-to-quarter swing. But you could read more into that than should be read into that. There were various and sundry factors that affected that. I don't think you will see much movement in that spread over the next couple of quarters, actually. I think that swing -- Q4 was probably an unusually high spread, and Q1 probably is a more normal spread. I don't think you will see much compression in that.
As I said in my prepared remarks, we expect our cost of interest-bearing deposits to continue to decline over the next couple of quarters. I would guess we will see some decline in the yield on the noncovered loan portfolio as well. But I think our cost of interest-bearing deposits for the next couple of quarters will be a significant mitigating factor offsetting that.
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Michael Rose, Raymond James & Associates - Analyst [6]
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Fair enough, and one more if I can. Just on how you are looking at capital at this point. Obviously, if you see it almost 11.3%, and the payout ratio here is still in the low 20% range, have you given any thought to giving it a more material increase to the dividend?
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George Gleason, Bank of the Ozarks, Inc. [7]
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Well, I think we will -- as I said in my prepared remarks, I think we will have ample opportunities to profitably deploy that capital. And you may have noted in my remarks that I shifted the order of priority of those four things that I think will ultimately result in us deploying that capital. And I shifted organic loan and lease growth to number one from number two and dropped FDIC acquisitions from one to two, because obviously the pace of those resolutions by the FDIC, while I think there's still a lot of them coming, the pace has slowed.
So -- but the positive thing about that shift in order is we are seeing a tremendously accelerating pipeline of opportunities for loan and lease origination. So I'm not only reiterating the guidance of $240 million in noncovered loan and lease growth this year, but I've emphasized in my prepared remarks the word minimum because I think that really is a minimum number. And we are -- we are getting so much equity in so many transactions now that a lot of loans that we are closing this quarter and that we closed in the first quarter won't have material funding or any funding until 2013 or really late 2012. But at the same time, we've also got a huge pipeline. We've got the best pipeline of loans today in queue for closing that we have ever had in the history of the Company. And when I talk about loans in pipeline in queue for closing, I'm talking about loans that are approved that the customers have agreed to documentation as being prepared and they are lined up waiting to be closed as the lawyers finish preparing loan documents and so forth. We are at an all-time high in that.
So we are feeling pretty optimistic about our ability to really generate the loan growth in 2012-2013. And that a lot of those deals, the larger, more complex transactions, will have funding that will drag all the way out into 2014. So we are really seeing that pipeline of future growth build. Because we're getting so much equity in most of those transactions -- again, it's some quarters out after you close them before they actually start funding, in a lot of cases. But that growth is coming. So we think that's going to be the preeminent vehicle and the most profitable vehicle for capital deployment.
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Michael Rose, Raymond James & Associates - Analyst [8]
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Great, thanks.
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Operator [9]
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David Bishop, Stifel Nicolaus.
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David Bishop, Stifel Nicolaus - Analyst [10]
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In terms of the closed loans you had funding, has there been any sort of change in terms of tenor, the underlying types of loans here? Or, are they still predominantly, as you alluded to, construction type commercial real estate loans that have yet to fund?
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George Gleason, Bank of the Ozarks, Inc. [11]
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That would be correct, yes. They are predominantly construction and development commercial real estate loans, exactly.
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David Bishop, Stifel Nicolaus - Analyst [12]
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And then, in terms of -- you said, in terms of the outlook for expense growth, you mentioned some realignment in terms of both North Carolina and Atlanta. Obviously a lot of the growth is still dominated by the Central Texas regions, Arkansas. What are you seeing out there in sort of the hinterlands of the franchise yet? Any sort of inklings of demand, especially in Atlanta?
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George Gleason, Bank of the Ozarks, Inc. [13]
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We are actually seeing a few opportunities. And one of our long-standing lenders from central Arkansas here, who, when we started making acquisitions, took over as one of the two-person teams overseeing two of our acquired banks in Georgia, has been evolving her role in the Company over the last several months into a role with real estate specialties group. So we expect her to relocate to Atlanta probably around the end of June or July 1, and we will open what will probably be our 28th Georgia office at that time in Atlanta. And that will be a satellite office of our real estate specialties group team utilizing their screening capabilities, their underwriting capabilities, their closing and servicing capabilities to allow us to look at larger commercial real estate and construction and development transactions in Georgia.
Now, the real state economy in Georgia is still severely oversupplied in almost every category. But we are seeing for some really national credit tenants some opportunities to do some build-to-suits on stores, locations that they want to open. And in very carefully selected locations on really marquee, primo properties that have very strong tenant bases and good tread on the leases and so forth, we are seeing some opportunity. So it's a market where you've really got to be careful, because it is, in a general sense, oversupplied across almost every category of product in the market. But there are selected properties, selected projects with particular tenant profiles and locational advantages where you can do some good business. So we want to start getting in and really carefully cherry-picking and mining some good business opportunities.
That location of that new office and the realigning of how those Georgia offices have previously handled real estate lending to really bring it into our highest level of underwriting documentation and servicing standards is an important step to us getting more offensive-minded in Georgia. And of course, the opening of our second office in mobile, Alabama later this year; the relocation of those Bluffton, South Carolina and Wilmington, North Carolina offices to new expanded, enhanced purchase facilities that we've got under contract and the relocation of our Charlotte loan production office into a full-service banking operation in a new facility we are building there all reflects the fact that we think there's really good potential in the Southeast. And that's going to be a real important growth area for us in the future. That's going to be much more 2013-2014-2015 than it is 2012 growth. But you've got to put the platforms in place and build what you need to capitalize on those future opportunities now.
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David Bishop, Stifel Nicolaus - Analyst [14]
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Great, thanks, George.
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Operator [15]
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Matt Olney, Stephens.
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Matt Olney, Stephens Inc. - Analyst [16]
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Going back to you organic loan growth commentary, it seems like the unexpected paydowns were a problem in 2011. Was this also an issue in the first quarter? And what are your thoughts on this in 2012, given many of your competitors are getting very aggressive on pricing and in some cases getting very aggressive on structure?
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George Gleason, Bank of the Ozarks, Inc. [17]
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Yes. We had three significant paydowns in Q1. One of them was a multi-family project that we had done the development on, and it was a 50% loan-to-cost project. It was a Texas property -- we really liked the project. They had built it, they got it stabilized and doing really well. While we really liked the project, what they wanted to do, they wanted us to basically refinance out their equity and increase our leverage in the project. And while the project was a great project, the financial profile of the borrowing entity on that just was not one that we were comfortable in taking out their subordinate debt piece and reloading the thing with a higher leverage. The numbers worked fine on it at a higher leverage, but we just had some concerns about doing that. So we let that business go.
We had a pretty sizable C&I loan, a $12 million or $13 million loan, that we got paid off on in the Southeast or really, I guess, mid-Atlantic area that was a nice piece of business. But our risk-adjusted pricing model on it just was a lot higher pricing than where they got it refinanced. And we like the customer and like the piece of business, and I'm sure we'll do business with that customer in the future. But when they showed us quotes they got from a couple of the mid-Atlantic competitors, we just said, wow, those guys really want the business. And when we put our risk-adjusted pricing on it, it just didn't fit. So we thanked them for the opportunity and let that go, and we will look for new opportunities to do business with those guys in the future.
And then we had one other loan that at the moment is escaping me; it was a $10 million plus --
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Greg McKinney, Bank of the Ozarks, Inc. - CFO, EVP, Chief Accounting Officer, Controller [18]
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The (inaudible) [land].
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George Gleason, Bank of the Ozarks, Inc. [19]
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Oh, yes, we had a large timberland loan that was down in -- I guess that would have been in the [agri] loan book, that got refinanced. And that was a pricing deal, and there were some relational attributes to that that affected that opportunity. So we lost that piece of business, but we are already having dialogue with that customer and we have actually introduced that customer to a couple of other really good business opportunities that we just knew about from other customer relationships we have in another state. And we've introduced that customer to new opportunities and we're already having dialogue with them about one or two new opportunities there.
So it was nothing problematic, and I don't think it's anything that would indicate a wave of payoffs. I think a lot of the things that were going to pay off and refinance have done that, and my guess is the first quarter probably had the -- probably could be the high point of the year as far as sort of (technical difficulty) expected payoffs on things.
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Matt Olney, Stephens Inc. - Analyst [20]
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All right, and just shifting over to -- on the credit quality side, the OREO balance is just now $18 million. Can you give us an idea of what's in that OREO balance?
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George Gleason, Bank of the Ozarks, Inc. [21]
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A lot of stuff. It is an assorted menagerie of stuff. We had an exceptionally good quarter in selling OREO. We sold about 100 properties. In our loss share covered OREO book, we sold 74 properties for $7.5 million. Of course, we put a whole bunch more in there as well, but had some really nice liquidation. We sold that large land tract we talked about in Texas in several previous calls, and we sold quite a few other smaller properties. We had close to -- counting covert OREO and noncovered, we had close to 100 sales in the first quarter. And I would guess that we are on track to have that many or even more sales in Q2 from the number of OREO sale case studies that I've read and signed off on. There's a lot of work being done on that, and we are seeing a lot of activity out there. So that was -- we view that as very positive.
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Matt Olney, Stephens Inc. - Analyst [22]
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And then lastly, do you have the OREO write-down amount for the first quarter?
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George Gleason, Bank of the Ozarks, Inc. [23]
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It's about $900,000 -- 9 what?
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Greg McKinney, Bank of the Ozarks, Inc. - CFO, EVP, Chief Accounting Officer, Controller [24]
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$994,000.
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George Gleason, Bank of the Ozarks, Inc. [25]
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9 what?
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Greg McKinney, Bank of the Ozarks, Inc. - CFO, EVP, Chief Accounting Officer, Controller [26]
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$994,000.
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George Gleason, Bank of the Ozarks, Inc. [27]
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$994,000. So, gosh darn, we almost hit $1 million. But I suspect that number -- obviously, with these OREO balances getting less and less and us having very aggressively written down lots of these assets, our philosophy is if we haven't and they don't sell, we write them down. If they don't sell the next couple of quarters, we write them down -- we just keep adjusting values until we get them down to where we can push them out.
So I would expect that number will have a declining trend, most likely. And that's part of the reason for our guidance that we expect noninterest expense will decline over the next couple of quarters even further from the Q1 level because we are expecting a moderation in that OREO write-down cost.
------------------------------
Matt Olney, Stephens Inc. - Analyst [28]
------------------------------
All right, George, very helpful, thank you.
------------------------------
Operator [29]
------------------------------
Kevin Reynolds, Wunderlich Securities.
------------------------------
Kevin Reynolds, Wunderlich Securities, Inc. - Analyst [30]
------------------------------
Rather than focus on sort of next quarter or next couple of quarters, I want to ask kind of a bigger picture question. You talk about loan growth, offering guidance in round numbers out through 2014. I'm assuming that between now and then, we probably get higher rates. You've mentioned your core margin here in the near-term hanging in there because you've got some flexibility. What do you think your margin does in round numbers over a three- to five-year period from kind of a six-ish level?
And then I guess, if the assumption is that it doesn't go a lot higher and may come down a little -- I don't mean to put words in your mouth -- but if the offsets, the efficiency ratio, I think you're running a little higher than you have in the past before you made acquisitions. How low do you think you could bring the efficiency ratio down and still maintain service levels, now that your footprint is sort of a larger multi-state footprint than it has been in the past?
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George Gleason, Bank of the Ozarks, Inc. [31]
------------------------------
Well, let me tell you on the -- as far as giving three to five-year guidance on margin, I'm not prepared to try to do that. I didn't consult my Ouija board. Of course, I don't have a Ouija board, but I think I might have to buy a Ouija board to try to give you three or five-year guidance on margin. We are in such extraordinary times with the unprecedented monetary and fiscal policy initiatives of our federal government and the just changing world landscape with China and what's going on there and what's going on in Europe, and the deficits we have both from a budget and a trade point -- it is really hard to know. So our philosophy is that we are not smart enough to know what's going to happen to interest rates long-term.
So what we try to do is just maintain our balance sheet as close to a neutral interest rate risk position as possible. So if rates go up 500 basis points, we are still making really good margins. And if rates went down further, which is hard to figure out how that would happen -- but, you know, whatever happens to rates, we've got a fairly consistent net interest income number that has not moved significantly one way or the other by increases or decreases in rates. And I think that the interest rate world that we're going to be in longer-term is going to be more volatile even than it has been in the last 15 years. So we are paying more attention to interest rate risk management than we probably never have, and what is amazing to me is how many banks are extending the duration of their portfolios out of a desperation for yield and earning asset and, I think, taking extremely high levels of interest rate risk based on my estimates of what some of these other banks are doing.
So we are going just the opposite way and trying to be more judicious than perhaps we've ever been before in controlling interest rates. So I would say that.
The second big picture thing that I would tell you is that if you look back at a 15-year history of our Company since we went public, back in the 2000 range, our margin got beat up in there, and our margin got beat up in the kind of, oh, 2005-2006-2007 time frame, I guess. One of the reasons that our margin got beat up in those two time frames was we were so CD-oriented. Our deposits were 70% plus CDs, and we just didn't have this powerful, very profitable core deposit banking franchise. And Tyler Vance and the retail banking team really started to reengineer all of that in the first quarter of 2008, and our entire retail banking team has just done a phenomenal job. And now -- and I keep thinking we can't get it any better, but in the last quarter, our non-CD deposits at period and were 70.65% of total deposits, and on an average basis for the quarter were 69.21%. And both those numbers were a percent plus better or about a percent, 90 basis points and 184 basis points better than they were in the fourth quarter.
So the guys just keep improving the mix of the deposit base, and you can see that in not only the fact that we're continuing to take cost out of our interest-bearing deposits and, as I alluded to in the prepared remarks, we expect to continue to do that. But you can see that in the fact that even with the new service charge regulations on overdrafts and so forth that went into effect July 1 of last year, our service charge income is just having really nice growth, and that reflects this more valuable deposit base.
So I don't think that deposit costs gyrating wildly, and particularly CD deposit costs gyrating wildly, will create the challenges for us in maintaining a net interest margin that we are real happy about in the future like it has in the past because we are just a different company from a deposit perspective now than we were five years ago. And that gain in the profitability of our core franchise is also a significant reduction or a significant factor in reducing the volatility of our margin going forward. So I think we're going to be a lot better off than we would be if we didn't have this deposit base transformation.
So let me leave your three- to five-year margin question with just those sort of two general comments. And as we get farther out, we will have commentary on where we think those numbers are going to be.
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Kevin Reynolds, Wunderlich Securities, Inc. - Analyst [32]
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Okay, and then -- thanks for that. And then going to the efficiency ratio and some of your comments about your ability to monitor (technical difficulty) that volatility and protect the balance sheet started me thinking down the path of a lot of (technical difficulty) smaller banks out there that may not have the expertise or the resources to do that as well as you. Do you think -- and this is actually kind of a branch question as well. You've got 113 offices now and a footprint that extends from Texas over to Florida. How many offices do you think you probably need, long-term, to really exploit the opportunities there? And do you think you will have an opportunity to pick up some small banks that don't see this interest rate risk coming ahead of them or don't have the resources to more effectively manage it like you might be able to?
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George Gleason, Bank of the Ozarks, Inc. [33]
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Well, I think the smaller you are in the industry, particularly once you get below $1 billion, the interest rate risk environment, the challenges of being able to produce earning assets, the growing regulatory burden on small banks, the complexity of accounting within our industry -- there are just a whole lot of reasons that it takes a really special few people to effectively run a really small bank. And I think there will be a lot of small bankers that will tire of the challenges of successfully managing a small bank or find it impossible to, any longer, generate earnings they are happy with as a small bank. So I think there will be a significant wave of consolidation coming, and we would hope that we could find transactions that would be very lucrative for our shareholders that we can get done. So yes, I think that exists.
Now, the more important question, I think, is your question about, gosh, we've got 113 branches. How many do we need and how many will we need? And I would answer this. Today, I need about 60 of those branches. We could fund our balance sheet with 50-something less branches today and be immensely more profitable. But I believe in three years or four years, with the growth that I think will actually materialize in our franchise and the opportunities that I think are before us, I will need 120 branches. And in five years, we'll need 130 or 140.
So we have built four or acquired four new branches in the Dallas Metroplex in the last year, and all four of those were acquired Wachovia/Wells Fargo duplicate branches. Wells Fargo and Wachovia both had great branch networks in the metro Dallas area that largely overlapped each other, and we bought as many of those branches as we could that they owned. They only owned about 7 of them; the rest of them were leased. But I think we bid on seven and got four of the seven branches we bid on, and they're great facilities.
And the last thing in the world I need now is another branch and the overhead of another branch because I've got more branches than we need to fund the balance sheet we have today. But here's the deal on that. In metro Dallas area, it's very difficult to buy strategic locations. Most developers, when they develop big power shopping centers or whatever, big development projects, they won't sell the out parcels because they want to lease them and keep that constantly growing income stream for decades or centuries to come. So you can't buy the really primo locations, in a lot of cases, which is why 80% of those Wachovia and Wells Fargo duplicate branches we looked at were leased instead of owned. And we like to own our real estate because it's much more cost-effective for us, much more efficient for us to own the real estate.
So number one, by buying those branches, I'm buying branches in locations that I may never, if I pass this opportunity, we may never be able to buy those sites again. In my lifetime or the lifetime of Greg McKinney and Tyler Vance and other managers in our Company who will probably live longer than me, they may never have another shot at those.
And number two, buying them in this economy, we are probably in those at 60%, 70% of what it would cost us to reproduce them if we could reproduce them, if we could acquire a site and build them. So I'm looking at it with the mindset that we are getting highly strategic locations that may be truly irreplaceable in the future, and I'm buying them at a 30% or 40% discount to replacement cost. So if I buy them now but really don't need them for three more years, I'm still doing something that is really good for my shareholders.
So that's our focus on that.
------------------------------
Kevin Reynolds, Wunderlich Securities, Inc. - Analyst [34]
------------------------------
Okay, thanks for all that, George.
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Operator [35]
------------------------------
Derek Hewett, KBW.
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Derek Hewett, Keefe, Bruyette & Woods - Analyst [36]
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I might have missed this in your prepared comments, but did you discuss any sort of goal of increasing your earnings on a linked-quarter basis like you typically comment on?
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George Gleason, Bank of the Ozarks, Inc. [37]
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We said that we expected to. Our goal was we thought it was a reasonable goal to improve on our first-quarter earnings in each succeeding quarter of 2012.
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Derek Hewett, Keefe, Bruyette & Woods - Analyst [38]
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Okay.
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George Gleason, Bank of the Ozarks, Inc. [39]
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Our first-quarter earnings were obviously just a little change over $18 million, so our goal is to improve on that number each quarter.
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Derek Hewett, Keefe, Bruyette & Woods - Analyst [40]
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Okay, great, thank you very much. And then could you also talk about the timing of your minimum loan growth goal for this year? Is it something that we will be able to kind of see the path towards that minimum growth rate of $240 million in the second quarter, or is it going to be more back-end loaded?
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George Gleason, Bank of the Ozarks, Inc. [41]
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Well, I think it will be more back-end loaded, but I think you will certainly see progress in Q2. And I think to really look at this, we give that contingency and commitment footnote disclosure -- we give that in our Qs, don't we, Greg, in addition to the annual? Yes, so that's in there. Look at the footnotes in the annual report, and that number is -- again, it was $313 million at December 31. It was $391 million, a $78 million increase, in Q1. I think you will see that number escalate significantly when we release or announce the June 30 number. I think you will actually see the balances of loans on the books increase in Q2 as well. And I think you will see an accelerating trend in the balances on the books, the amount of increase quarter to quarter to quarter this year. And my guess is that you will actually see that commitments number increase quarter to quarter to quarter this year because we are building a lot of momentum for growth, and doing a lot of really low-leverage deals. We've had four deals in the pipeline recently that are substantial size deals. And just to give you a perspective, one of those deals is like 55% loan to cost. One of them is a 48% loan to cost, one of them is a 25% loan to cost and one of them is a 22% loan to cost.
The 22% loan to cost transaction is not actually yet approved, but its term sheet -- all the others are approved. The 22% -- that commitment will appear once that loan gets closed, assuming it does, but we won't fund anything on that loan until 2014 because it's -- there's massive amounts of equity. 78% of the cost of the project's coming in, in equity, ahead of us, and they will fund virtually all of that before we fund anything.
So you will see that commitment number building. And I know, if you were -- in a lot of banks, if they were giving you a 2014 loan growth number, they would just be guessing. But we actually have models and reasons and things that we are working on that give us a lot of bases to actually think about and give you an intelligent estimate for 2014.
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Derek Hewett, Keefe, Bruyette & Woods - Analyst [42]
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Okay, great, thank you very much. And then in terms of that 60 acres of land in Dallas that was OREO property, what percentage of that was related to -- or what percentage was that of the total OREO decline?
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George Gleason, Bank of the Ozarks, Inc. [43]
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Well, that number was essentially the amount of the decline. Now we sold another 20 or so pieces of noncovered OREO in the quarter, but we had other items that left non-accrual loans and went into noncovered OREO that pretty much offset that. So that, if you -- there was a lot of movement in that book of business or book of assets in the quarter. But the net change in that book of assets was essentially the sale of that Texas property.
------------------------------
Derek Hewett, Keefe, Bruyette & Woods - Analyst [44]
------------------------------
Okay, and did you guys finance that sale?
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George Gleason, Bank of the Ozarks, Inc. [45]
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We did provide some financing for that sale, yes, we did. There's substantial equity in the transaction. I think it was 30% plus cash equity went in, but we did finance the rest of it, which we are very comfortable doing.
------------------------------
Derek Hewett, Keefe, Bruyette & Woods - Analyst [46]
------------------------------
Okay, thank you.
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Operator [47]
------------------------------
Jeff Bernstein, AH Lisanti.
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Jeff Bernstein, AH Lisanti Capital - Analyst [48]
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A couple of additional questions on lending activities in the quarter -- so it sounds like you are doing, still, a fair amount of construction and development. Can you give kind of breakdown on how much investor CRE you did and maybe any owner-occupied CRE could you did kind of as a percent?
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George Gleason, Bank of the Ozarks, Inc. [49]
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You know, I don't have that -- we have that information available. I don't have it at my fingertips. But I'll make a comment on that. There is a sentiment out there that investor properties are not as safe as owner-occupied properties. And that is a broad brush generalization that I would tell you is how banks that don't understand real estate think about properties.
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Jeff Bernstein, AH Lisanti Capital - Analyst [50]
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Oh, agreed.
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George Gleason, Bank of the Ozarks, Inc. [51]
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If its owner-occupied, it must be good. If it's not owner-occupied, it must be risky. We don't really -- we keep data on that and break the portfolios down by that and we look at that. But -- and I'll tell you how this plays out. We lost a piece of business a few weeks ago to one of the big regional competitor banks we compete with that was owner occupied, and it was an okay piece of business. But it was just okay, it was not great. And they priced that thing through the roof, you know, just -- super, super, super, super cheap to get that piece of owner-occupied business. In the same time frame, and it may not have been the same week, but within a week or two of that, we took away a piece of business from that same bank that was non-owner occupied, and it was a great piece of business, a really primo piece of property in a great location with great tenants. But the mindset at that bank is, we want to run off non-owner occupied property. We want to move them out and we want to do all owner-occupied. So they would trade a mediocre owner-occupied piece of property that they are going to get a 3.75% yield on and run off a really premium, quality asset, non-owner occupied piece of property that could have gotten a 5.5% on.
What we try to do is not focus on is it owner occupied or is it not owner occupied, but is it a great asset? Does it have great leases and a great debt service coverage? Does it have a long life to it? We try to understand the real estate and underwrite that and actually think instead of using just gross generalizations and say,, well, this is bad and this is good. It's like people; you can't make generalizations about people. You've got to know their character and their integrity and what sort of human being they are, and the generalizations don't apply. You've got to meet every one of them and really know who they are. And you've got to do the same thing with real estate loans. You've got to really understand the project and all of the dimensions and metrics of it, and then you can make a smart decision.
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Jeff Bernstein, AH Lisanti Capital - Analyst [52]
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I appreciate that color. In the investor CRE and owner occupied, is this still essentially refi take-away business? Or are there some transactions actually going on?
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George Gleason, Bank of the Ozarks, Inc. [53]
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It's a lot of both. We are doing a lot of transactions, obviously a lot of stuff in the construction and development book. My allusions to closing loans that are going to fund over the next year or two years or three years --
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Jeff Bernstein, AH Lisanti Capital - Analyst [54]
------------------------------
Sure.
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George Gleason, Bank of the Ozarks, Inc. [55]
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-- those are construction deals.
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Jeff Bernstein, AH Lisanti Capital - Analyst [56]
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Yes.
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George Gleason, Bank of the Ozarks, Inc. [57]
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A lot of those are built-to-suits or specific tenants or owner occupants, in some cases, of those properties.
So we are seeing a lot of that, certainly the best volume of that we've seen in probably three or four years, probably four years. And we are continuing to see a lot of business opportunities to take away business from competitors or stuff that is moving out of special servicing type environments (technical difficulty) our customers are buying those properties.
You know, a good example -- a lot of our customers -- we have a number of customers who go out and buy assets from special servicers. And our typical structure on those deals is our customers buying the asset at about 50%, more or less, of the prior loan balance, and then they are putting in 50% equity and we are loaning 50% of their purchase price. So in those deals, we're typically in it at about 25% of the basis that the prior lender was in on that.
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Jeff Bernstein, AH Lisanti Capital - Analyst [58]
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So, George, I keep getting this feeling like you've got one foot on the gas and one foot on the brake, that you are cherry-picking these loans to such a degree that -- is that where the visibility comes from, in part, that there's plenty of pretty good business to do, but you are not settling for that? Is that how I should be thinking about this?
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George Gleason, Bank of the Ozarks, Inc. [59]
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I think that's an excellent characterization of where we are. We are very much keeping a foot on the brake, and we are very much pushing the accelerator at the same time. And we are looking at lots and lots and lots of business to find things that we are really comfortable with that we can make a good profit margin on and that we think will stand up to the rigors of what I think is going to be a really bumpy economy for many, many, many years to come.
I sort of see our US economy as, to use -- if you were a power boater, you would use the term porpoising. I kind of see our economy porpoising along. We kind of get the nose out of the water and we're going to hit a bump and get the nose back down and we are going to get the nose up again. And I just see the economy as sort of bouncing along in that fashion for years to come.
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Jeff Bernstein, AH Lisanti Capital - Analyst [60]
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Okay, so you would agree with me that good loans are made in bad times, but you are wearing a belt and suspenders here?
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George Gleason, Bank of the Ozarks, Inc. [61]
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Well, I tell you what. Some of the stuff that I see being done today by some other banks, and I don't know how widespread it is, but I'm seeing bad loans made today that are going to come back to haunt people. They are being way too aggressive because they are desperate for business.
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Jeff Bernstein, AH Lisanti Capital - Analyst [62]
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Got you.
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George Gleason, Bank of the Ozarks, Inc. [63]
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And I would much rather (technical difficulty) is within our capabilities to produce and not have to growth and go stretch on credit terms and put a lot of interest rate risk on our books right now to get it. So we're in a very fortunate situation that I think we can stick to our very rigorous credit standards and generate a lot of growth and stick to appropriate profitability standards, margin standards, and still generate a lot of growth. And I think we are in a unique situation with the ability to do that. There are, certainly, a lot of other banks that can do that. But I think there are a lot of banks that cannot do that.
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Jeff Bernstein, AH Lisanti Capital - Analyst [64]
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I appreciate that, thank you.
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Operator [65]
------------------------------
Brian Martin, FIG Partners.
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Brian Martin, FIG Partners - Analyst [66]
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Just two last things -- the classified loans in the quarter, what was the trend you saw there? I know the OREO went down, which impacts classified assets, but just the classified loans -- were those about stable, similar to the nonaccrual loans in the quarter?
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George Gleason, Bank of the Ozarks, Inc. [67]
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You know, Brian, actually I haven't looked at that number. I've looked at the nonperformers and so forth, but I haven't looked at the classifieds. And Greg is looking as blank as I am on that, so I don't think there was -- yes, I think any move on that was to the positive. Certainly, the classified assets with that $14 million-$15 million reduction in the OREO book are going to show a very favorable trend. The loans -- I've not actually broken that down and looked at that yet. But I think it would be positive. Our nonperforming loans went down, I think, 7 or 9 basis points from the prior quarter end. Our past dues went down like 70 basis points from the prior quarter end. So all of that would suggest to me that there was probably something of a favorable trend in that number. But, again, I haven't actually looked at that.
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Brian Martin, FIG Partners - Analyst [68]
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Okay, and how about just one other thing, and that was on the loan mix. I know there wasn't much change in the uncovered balances this quarter. But when you look at the growth that you guys are expecting, can you give a little bit of color on where you think the construction book and the CRE book played out with some of this growth that you see materializing as far as -- are there limits as far as how high you will take the construction portfolio on a relative basis in the commercial real estate book, if you could just give a little color on how you guys look at those -- that measurement?
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George Gleason, Bank of the Ozarks, Inc. [69]
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Well, in the quarter, our commercial real estate book went up $30 million in Q1. It went from 37.6% of the portfolio at year end 2011 to 39.0%. Our construction and development loan book went up $10 million from 25.4% of the total portfolio to 25.8%. Our multi-family went down $10 million, and part of that was we had about a $15 million payoff in that book that I mentioned. Our C&I went down $12 million (technical difficulty) about that credit, and our [IKE] real estate loans went down $14 million. We talked about that credit.
So the commercial real estate and the construction and development book both grew in the quarter. And I would expect that's going to be just the way it is. That's what we do best.
I've said a number of times; we could generate more consumer loans, and I could generate more C&I loans. And I would expect my losses on consumer loans and C&I loans to be four to six to eight times the charge-off ratio that I would expect from our well underwritten, documented and serviced CRE and construction and development loan book. We are really good at that, and that's what we're going to continue to do. And that's where most of our growth is coming.
Now, certainly, if we generate the growth in that book that I would expect over 2012, 2013, 2014 and probably continuing beyond that, we will have a really high concentration of those types of loans. And we totally understand that. But we are looking at it -- within those categories; we're looking at broad-based diversification of the portfolio geography, broad-based diversification of the portfolio based on product type, tenant, users. And the real key is not how much of it you have, the real key is how well underwritten is it. And one of the mantras that I've been preaching -- I was in Dallas yesterday at our real estate specialties group all day. And I stressed to those guys, as I do constantly, we are going to have more and more and more of these loans, and they've got to be better and better and better loans.
So that's why you are seeing us looking at so many loans that have 45% or 55% or 52% cash equity in them, is customers who have the wherewithal to put that kind of cash in the projects and the sophistication to have accumulated that kind of cash are generally customers that make things work. And if they don't, then we've massively mitigated any exposure we would have by having so much cash in those transactions.
So we are going to live in a world, and if you are a shareholder in our Company, you're going to be investing in a company that is a construction and development and CRE lender. We are really, really good at it. And we know we are heavily concentrated in it. We're going to diversify that portfolio within those types as broadly and effectively as we can, and we are going to mitigate the risk by underwriting these loans extremely well, servicing them to the highest standards in the world and documenting them to the highest standards in the world and getting lots and lots of cash in them so that our risk is greatly reduced.
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Brian Martin, FIG Partners - Analyst [70]
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Okay, thanks for the insight.
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Operator [71]
------------------------------
Peyton Green, Sterne, Agee.
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Peyton Green, Sterne, Agee & Leach, Inc. - Analyst [72]
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Good morning, George, congratulations another strong quarter. My question comes -- and I apologize if I missed this earlier. But to what degree do you see the live banker traditional M&A market playing out over the next couple of years in the context of you all's approach?
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George Gleason, Bank of the Ozarks, Inc. [73]
------------------------------
Well, we are certainly looking at that. Dennis James, who has taken the position, moved within our Company into that director of M&A role -- Dennis has been traveling extensively. He's going to -- he may accumulate more frequent flyer miles than anybody in the Company. And obviously, there are, for all practical purposes, almost unlimited opportunities out there for that.
So our philosophy on live bank M&A is just like our philosophy on failed bank transactions, and that is we're only going to do transactions that we thoroughly understand and are going to be very profitable for our shareholders. And I think there will be a lot of those. My guess is we will look at 20 or 30 deals for every one we will do. And when I'm saying looking, I'm not talking about sitting at the desk looking at somebody's financials; I'm talking about actually going to look at a bank.
So I think that will be very much like our experience with the FDIC transactions. We're going to look at a lot. We're going to be very conservative in the way we approach them and we're going to get the ones that we can get that we can make a really good profit on and have a really accretable yield situation for our existing shareholders. And the ones that get into very competitive bid situations and everybody wants it and everybody is willing to pay up for it -- those are not going to be our deals.
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Peyton Green, Sterne, Agee & Leach, Inc. - Analyst [74]
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Okay. I guess as a follow-up, do you see the activity becoming more likely in the next couple of quarters, or is it just too episodic to peg a time frame?
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George Gleason, Bank of the Ozarks, Inc. [75]
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I would go with your choice of too episodic to predict a time frame. When we find the right deal, we will have the deal, and that could be next week; it could be five years from now. And I'm not aware of an opportunity next week, and hopefully we will hit one more than five years, so (technical difficulty) my comment there was extreme. But it's hard to predict, it's hard to know.
But the important thing is not when we are going to get one. The important thing is that we are going to stick to our discipline. And if we get one that makes really good sense for shareholders and it's clearly, obviously advantageous to our shareholders to do it, we are going to do it. And if we don't get one that meets that criteria, we are not going to do one. So what we're going to do is more important than when we are going to do it.
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Peyton Green, Sterne, Agee & Leach, Inc. - Analyst [76]
------------------------------
Okay, great, thank you very much, George.
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Operator [77]
------------------------------
Joe Fenech, Sandler O'Neill.
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Joe Fenech, Sandler O'Neill & Partners - Analyst [78]
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My question was asked. Thank you.
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Operator [79]
------------------------------
And at this time, we have no further questions. I'll turn the conference back over to management for any closing remarks.
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George Gleason, Bank of the Ozarks, Inc. [80]
------------------------------
All right. Thank you guys all very much for joining the call today. We appreciate your attendance on the call. We appreciate the good questions and look forward to talking with you again in about 90 days. Have a good day. Thank you. That concludes our call.
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Operator [81]
------------------------------
And again, that does conclude today's conference. Thank you for your participation.
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