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Bank of the Ozarks (NASDAQ:OZRK)

Q4 2012 Earnings Call

January 17, 2013 11:00 am ET

Executives

Susan Blair

George Gleason - Chairman, Chief Executive Officer, Member of Alco & Investments Committee, Member of Loan Committee, Chairman of Bank of The Ozarks and Chief Executive Officer of Bank of The Ozarks

Greg McKinney - Chief Financial Officer, Chief Accounting Officer and Chairman of Alco & Investments Committee

Analysts

Michael Rose - Raymond James & Associates, Inc., Research Division

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Matt Olney - Stephens Inc., Research Division

Blair C. Brantley - BB&T Capital Markets, Research Division

Brian Joseph Martin - FIG Partners, LLC, Research Division

Jordan Hymowitz

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Operator

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

Susan Blair

Good morning. I'm Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks.

The purpose of this call is to discuss the company's results for the quarter and year just ended and our outlook for upcoming quarters. Our goal is to make this call as useful as possible in understanding our recent operating results and future plans, goals, expectations and outlook.

To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook for the future, including statements about economic, real estate market, competitive credit market and interest rate conditions; revenue growth; net income and earnings per share; net interest margins; net interest income; noninterest income, including service charge income, mortgage lending income, trust income, income from bank-owned life insurance, net FDIC loss share accretion income; other loss share income and gains on sales of foreclosed assets, including foreclosed assets covered by FDIC loss share agreements; noninterest expense; our efficiency ratio, including our goals of achieving a sub 40% and, eventually, a sub 30% efficiency ratio; asset quality and our various asset quality ratios; our expectations for net charge-offs and our net charge-off ratios; our allowance for loan and lease losses; loan, lease and deposit growth, including growth in our legacy loan and lease portfolio through 2014 and growth from unfunded closed loans; changes in the value and volume of our securities portfolio; the opening and relocating of banking offices; our plans for traditional mergers and acquisitions; our goal of making additional FDIC-assisted acquisitions; other opportunities to profitably deploy capital and our positioning for future growth and profitability.

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

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

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

George Gleason

Good morning, and thank you for joining today's call. We're very pleased to report our excellent results for both the fourth quarter and the full year of 2012.

Net income for the quarter just ended was our second best ever, coming in only behind the second quarter of 2011, when we benefited from a significant bargain purchase gain from 2 FDIC-assisted acquisitions. Likewise, our net income for the full year of 2012 was our second best ever, trailing only our 2011 net income with its significant bargain purchase gain from 3 FDIC-assisted acquisitions.

Our 2012 results included many highlights: our net interest margin continued to be among the best in the industry; our efficiency ratio was very good; and our already excellent asset quality improved further during the year; non-interest income included record annual results for service charges on deposit accounts, mortgage lending income and trust income; we achieved excellent growth in loans and leases, which, excluding covered loans and other purchased loans, grew $235 million; on the last day of the year, we closed our acquisition in Geneva, Alabama, our first live bank acquisition since 2003.

While our 2012 results were excellent, we are even more pleased by how well positioned we are for future growth and profitability. Let's look at 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.

During 2012, our loans and leases, excluding covered loans and other purchase loans, grew $235 million or 12.5%. That's a solid result but it does not fully reflect how effective our loan and lease teams were in producing new business.

During 2012, our unfunded balance of closed loans increased from $313 million to $769 million. While some portion of this unfunded balance will not ultimately be advanced, we expect that the vast majority will be advanced in this $456 million increase during 2012 and our unfunded balance of closed loans has very favorable implications for future loan and lease growth. Because we're getting so much cash equity in so many of our loans, many loans closed in 2012 had only minimal amounts funded at closing or in the early months following closing.

At the beginning of 2012, we stated our expectation that we would have loan and lease growth of a minimum of $240 million in 2012. We came up $5 million short of that mark, but considering the huge increase in our unfunded balance of closed loans, we feel very good about the job our loan and lease teams did. Our $769 million of unfunded closed loans at year-end, coupled with the excellent pipeline of loan requests on which we are currently working, suggests to us that we will achieve our goal of a minimum of $360 million of net growth in loans and leases excluding covered loans and other purchased loans in 2013 at a minimum of $480 million in 2014. We are reiterating this prior guidance for both years and we consider both these targets to be minimums. Of course, like our guidance for 2012, this guidance for 2013 and 2014 excludes growth in loans and leases from any future acquisitions.

Despite the highly competitive environment, we are finding many opportunities for good quality, good yielding loans. Because our lending teams are maintaining such excellent pricing and credit discipline and getting so much cash equity in most new loans, I believe that the loans we originated in 2012 are among the highest-quality loans we have originated in my 33 years as CEO.

In regard to net interest margin, in our January conference call last year, we stated that we expected our net interest margin would fluctuate over the course of 2012 in a range of 6.05% to 5.80%. Our net interest margin results for each succeeding quarter of 2012 were 5.98%, 5.84%, 5.97% and 5.84%, respectively, all well within that guidance range.

Like our expectations and actual results for 2012, we expect some further downward pressure on net interest margin in 2013 due to both the declining volume of covered loans as a percent of our average earning assets and the low rate competitive environment in which we are operating.

The 5.84% net interest margin we achieved in the quarter just ended probably reflects the high side of our expectations for quarterly net interest margin in 2013. Specifically, we expect net interest margin in each quarter of 2013 to be somewhere between 5.84% and 5.60%.

This guidance is based on the assumption that we will achieve only our minimum target of $360 million of net growth in loans and leases, excluding covered loans and other purchased loans. If we exceed that minimum loan and lease growth target, we would expect a slightly lower net interest margin. For example, if in 2013 we achieve $480 million of net growth in loans and leases excluding covered loans and other purchased loans, we would expect our quarterly net interest margin to range somewhere between 5.80% and 5.55%. As you can see from the numbers just given, $120 million of additional growth, which we believe is a possibility, would correlate with roughly 5 basis points of additional margin compression over the course of 2013.

Of course, additional FDIC-assisted acquisitions or live bank acquisitions or other significant changes in the mix of our balance sheet during 2013 could also cause us to revise our net interest margin guidance.

In recent years, our net interest margin has consistently been among the best in the industry and is truly the result of a team effort. Our deposit team has very effectively achieved improvements in the mix of our deposits and steadily reduced our average cost of interest-bearing deposits. During the quarter just ended, they achieved another 2-basis-point reduction in our cost of interest-bearing deposits, from 33 basis points in the third quarter to 31 basis points in the fourth quarter. We expect our deposit team will achieve some modest further improvements in our average cost of interest-bearing deposits in 2013.

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 loans, was 5.82%, giving us an enviable 5.51% spread between our yield on such 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. Service charge income for the quarter just ended decreased 2.8% compared to the fourth quarter of 2011 and 4.0% compared to the record quarterly results achieved in the third quarter of 2012. This fourth quarter dip in service charge income was unexpected since the fourth quarter is normally our best quarter of service charge income. A cautious attitude among consumers, combined with the lingering effects of the unusually severe weather we had in Arkansas on Christmas day and the day following, probably contributed to this dip. Despite the fourth quarter results for the full year of 2012, service charge income was an annual record, increasing 7.2% compared to 2011.

Mortgage lending income for 2012 was an annual record and increased 70.4% compared to 2011. This strong year-over-year increase reflects a combination of factors, including a high level of refinancing resulting from near-record-low mortgage rates, the expansion of our mortgage lending team during 2012 and modest improvement in housing market conditions in many of our markets. Our fourth quarter results increased 30% -- or 29.3% compared to the fourth quarter of 2011, but decreased 11.3% compared to the third quarter of 2012. These quarterly results reflect the inherent volatility in mortgage lending income from quarter to quarter.

Trust income, like service charge income and mortgage lending income, also set a new annual record in 2012, increasing 7.8% from 2011. In addition, our fourth quarter trust income set a new quarterly record. These record annual and quarterly results reflect our continued efforts to grow our customer base in this line of business.

At September 30, 2012, our balance of bank-owned life insurance, or BOLI, was $93.8 million. On October 28 to November 1, we completed the purchases of an additional $29 million of BOLI, resulting in a balance of $123.8 million in BOLI at December 31, 2012.

Income from our 2012 BOLI purchases will help defray increasing costs associated with converting the company's existing 401(k) retirement savings plan to a Safe Harbor 401(k) plan and other growth and cost of employee benefits. As a result of the timing of these fourth quarter BOLI purchases, the additional BOLI did not contribute a full quarter's income in the quarter just ended. Based on the BOLI purchases in the quarter just ended, BOLI income from accretion of cash surrender value is expected to increase from $1,027,000 in the quarter just ended to approximately $1,095,000 in the first quarter of 2013.

Net gains from sales of other assets were $2.4 million in the quarter just ended, compared to $0.9 million in last year's fourth quarter. For the full year of 2012, net gains from sales of other assets were $6.8 million compared to $3.7 million in 2011.

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. 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 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 of covered OREO for some time to come. This has been evident in each of the last 10 quarters.

As part of our FDIC-assisted acquisitions, we record a receivable from the FDIC based on expected future loss share payments. And we record a clawback payable to the FDIC, based on estimated sums we expect to owe the FDIC at the end of the loss share periods. The FDIC loss share receivable and the related clawback payable are discounted to a net present value, utilizing a 5% per annum discount rate. The net discount amounts are then accreted into income over the relevant time periods. And in the quarter just ended, the resulting net accretion income was $1.3 million, down from $2.4 million in the fourth quarter of 2011 and $1.7 million in the third quarter of 2012.

For the full year of 2012, this net accretion income was $7.4 million compared to $10.1 million in 2011. This net accretion income should 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 diminish over time as loss share winds down, and you can see this trend over the last 6 quarters.

In addition, noninterest income in the quarter just ended included other loss share income of $3.2 million compared to $1.5 million in the fourth quarter of 2011 and $2.3 million in the third quarter of 2012.

For the full year of 2012, other loss share income was $10.6 million compared to $6.4 million in 2011. 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 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, 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 of covered loans, other loss share income will vary quite a bit from quarter-to-quarter.

We believe that our accounting, including our valuations for covered assets in connection with all 7 of our FDIC-assisted acquisitions, has been appropriately conservative. You can see our conservative philosophy in 4 items -- 4 line items of our income statement. First, the 9.01% effective yield on our covered loans in the quarter just ended reflects the substantial discount rates we utilized to determine the net present value of covered loans. Second, the significant net accretion income from our FDIC loss share receivable reflects the 5% discount we utilized to discount those assets to net present value. Some banks have used discount rates as low as 2%. Third, our other loss share income, primarily recovery income, as we've previously discussed, reflects the fact that our lending and special assets personnel have done a great job so far in maximizing recoveries on covered loans. And fourth, our gains on sales of other assets for the reasons previously discussed reflect both 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 $1.0 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 $2.4 million in gains on sales of other assets, mostly covered OREO, during the quarter and our $3.2 million of other loss share income during the quarter, mostly recovery income, you can see the overall conservatism with which we have valued these acquired portfolios. For the full year of 2012, our provision expense for covered loans was $6.2 million, but this was more than offset by our gains on sales of other assets which were $6.8 million and our other loss share income which was $10.6 million.

We continue to be very pleased with the current performance and future prospects of all 7 of our FDIC-assisted acquisitions. We also are continuing to pursue additional FDIC acquisitions, and we continue to main our -- maintain our discipline in pricing and our goals for profitability, both in the short-term and the long-term, for these transactions.

Given our pricing discipline that we are maintaining and the fact that we've not made an FDIC-assisted acquisition in the last 20 months, it's hard to handicap our prospects for making additional FDIC-assisted acquisitions. If, however, 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. We are beginning to achieve the loan and lease growth momentum needed for a post-FDIC acquisition environment as evident by our loan and lease growth over the last 3 quarters. Of course, loan growth from possible future FDIC-assisted acquisitions or live bank acquisitions would be icing on the cake.

Let's turn to noninterest expense. In the quarter just ended, our noninterest expense increased $1.2 million from the third quarter of 2012, and approximately half of that increase is due to acquisition and conversion costs related to our Genala acquisition. We expect to complete those systems conversions in May 2013, but we signed the contract for those conversions and accrued the costs in December. There will be small amounts of acquisition and conversion costs related to the Genala transaction in the first quarter and second quarter of 2013, but the $600,000 incurred in the quarter just ended should be the vast majority of such costs.

Despite the fact that our efficiency ratio is much better than the industry average, our level of noninterest 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. Except for the recently acquired office in Geneva, Alabama, operationally, our acquired offices are now fully integrated and operating efficiently, but 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 those portfolios. And as we complete that process, we expect our non-interest expense in our acquired offices to reach a more normal level. This, along with other factors, suggests that there may be some room to decrease noninterest expense from the level achieved in the quarter just ended. But we have said -- as we have said in recent conference calls, we believe the more important goal, 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. One of our key goals is to tap this growth capacity 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 time, we believe we have the potential to eventually achieve our longer-term efficiency goal of a sub 30% efficiency ratio.

We've continued to grow and expand. In January of 2012, we opened an expansion office in Austin, Texas for our Real Estate Specialties Group. In February, we opened our ninth Metro Dallas office in The Colony, Texas. In July, we opened our 10th Metro Dallas office in Southlake, Texas, as well as an expansion office in Atlanta, Georgia for our Real Estate Specialties Group. In August, we relocated from a leased facility to a new owned facility in Bluffton, South Carolina. In September, we opened our second office in Mobile, Alabama. In October, we relocated our Wilmington, North Carolina office from leased facilities to owned facilities. And in December, we relocated our original office in Mobile, Alabama from leased facilities to owned facilities. We expect this growth and expansion to continue.

In the first quarter of 2013, we plan to relocate our long-time Charlotte, North Carolina loan production office to a new full-service banking office which is nearing completion. We recently acquired a site in Cornelius, North Carolina for construction of a new full-service banking office expected to open in the third or fourth quarter of 2013. We are presently working on plans for 2 new banking offices in Bradenton, Florida with scheduled openings in the third and fourth quarter of 2013. One of these offices will replace a leased facility we will be vacating in Bradenton, and the other office will be in addition to our branch network. The new offices opened in 2012 and planned for 2013 reflect both the growing importance of Texas to our company and our shifting to a more offensive-minded business strategy in our southeastern markets.

Our December 31, 2012 Genala acquisition was completed. This transaction closed on the end of the business day for Genala, so none of its operating results for that acquired operation were included in our operating results for either the fourth quarter or the full year of 2012. However, the acquisition itself did result in a gain, net of acquisition and conversion costs, of approximately $1.1 million after taxes or approximately $0.03 of diluted earnings per common share. Accordingly, the transaction was accretive to our book value per common share, tangible book value per common share and diluted earnings per common share for the quarter just ended.

The transaction should have a neutral-to-slightly-positive impact on EPS for the first couple of quarters until we get all the integration work completed, and it should be modestly accretive to EPS thereafter. We consider this to be a small but meaningful addition to our franchise, the acquired institution that operated in Geneva, Alabama since 1901, and was a healthy bank with a great history and a solid market share. This acquisition provides us an opportunity to expand our already-substantial presence in the Southeast and provides a link between our 2 offices in Mobile, Alabama and our 2 offices in Bainbridge, Georgia. We continue to be very active in identifying and analyzing traditional M&A opportunities, and we expect 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 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 further improvement of some of our key asset quality ratios in the quarter just ended.

At December 31, 2012, excluding covered loans and purchased non-covered loans, our ratio of nonperforming loans and leases to total loans and leases was 0.43%, which was unchanged from September 30, 2012, and a 27-basis-point decrease from year-end 2011. This ratio for the past 2 quarters was our best ratio of nonperforming loans and leases since the fourth quarter of 2007.

At December 31, 2012, excluding covered loans and foreclosed covered assets and purchased non-covered loans, our ratio of performing -- nonperforming loans as a percent of total assets was 0.57%, which is a 2-basis-point improvement from September 30, 2012, and a 60-basis-point improvement from year-end 2011. 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 non-accrual loans and leases, was 73 basis points at December 31, 2012, which is a 12-basis-point increase from September 30, 2012, but an 80-basis-point decrease from year-end 2011. The last 2 quarterly past due ratios have been better than any other quarterly past due ratios since the third quarter of 2007.

Obviously, we've seen a significant improvement in the number of asset quality ratios in 2012. For the full year of 2013, we expect to see further improvement in a number of our asset quality metrics, including further reductions in our overall 2012 net charge-off ratio which was 46 basis points and our overall 2012 net charge-offs which were $12.2 million.

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 fourth quarter, pushing our ratio of common equity-to-assets to 12.56% and our ratio of tangible common equity-to-tangible assets to 12.31%.

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 recently increased our focus. The third opportunity for capital deployment is the potential for additional FDIC-assisted acquisitions. The fourth opportunity will likely come whenever interest rates increase significantly, and we consider it timely to reload our investment securities portfolio.

In closing, we feel that the quarter just ended was an excellent quarter, with its net income of $20.7 million. Of course, approximately $1.1 million of that income was due to the bargain purchase gain net of acquisition and conversion costs from the Genala acquisition. Accordingly, our goal for the first quarter of 2013, and we believe it's a reasonable goal, is to achieve net income of $19.6 million or more. In previous years, we've noted that the first quarter is typically the most challenging quarter of the year due to seasonal headwinds for service charge and mortgage lending income, and the impact of a fewer number of days on net interest income and other revenue metrics. We expect that in 2013, the first quarter will once again be the most challenging quarter.

Even considering these seasonal headwinds, we consider $19.6 million in net income as the minimum level of earnings we would like to achieve for the first quarter. A second goal, which we also think is reasonable, is to improve on that target level of earnings in each succeeding quarter of 2013.

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

Question-and-Answer Session

Operator

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

Michael Rose - Raymond James & Associates, Inc., Research Division

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

George Gleason

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

Michael Rose - Raymond James & Associates, Inc., Research Division

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

George Gleason

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

Greg McKinney

5.82%.

George Gleason

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

Michael Rose - Raymond James & Associates, Inc., Research Division

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

George Gleason

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

Operator

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

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

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

George Gleason

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

In Q4, I would tell you, I thought we made a tremendous amount of progress in the quarter on some of the nastier problem assets we've been working on, and I think we'll see that level just get much better over the course of 2013. I think we're really getting into the back end of working through a lot of the problems there.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

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

George Gleason

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

Operator

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

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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

George Gleason

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

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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

George Gleason

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

Operator

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

Matt Olney - Stephens Inc., Research Division

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

George Gleason

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

Matt Olney - Stephens Inc., Research Division

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

George Gleason

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

Matt Olney - Stephens Inc., Research Division

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

George Gleason

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

Operator

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

Blair C. Brantley - BB&T Capital Markets, Research Division

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

George Gleason

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

Greg McKinney

$70 million [indiscernible].

George Gleason

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

Blair C. Brantley - BB&T Capital Markets, Research Division

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

George Gleason

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

Greg McKinney

Yes.

George Gleason

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

Operator

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

Brian Joseph Martin - FIG Partners, LLC, Research Division

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

George Gleason

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

Brian Joseph Martin - FIG Partners, LLC, Research Division

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

George Gleason

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

Brian Joseph Martin - FIG Partners, LLC, Research Division

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

George Gleason

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

Brian Joseph Martin - FIG Partners, LLC, Research Division

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

George Gleason

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

Operator

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz

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

George Gleason

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

Operator

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

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

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

George Gleason

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

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

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

George Gleason

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

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

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

George Gleason

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

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

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

George Gleason

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

Operator

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

George Gleason

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

Operator

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

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