Good day, ladies and gentlemen, and welcome to the Bank of the Ozarks Third Quarter Earnings Conference Call. As a reminder, today's call is being recorded. At this time, it is my pleasure to turn today's call over to Ms. Susan Blair. Please go ahead.

Good morning. I'm Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company's results for the quarter just ended and our outlook for upcoming quarters. Our goal is to make this call as useful as possible in understanding our recent operating results and future plans, goals, expectations and outlook. To that end, we will make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook for the future, including statements about economic, real estate market, competitive, credit market and interest rate conditions; revenue growth; net income and earnings per share; net interest margins; net interest income, including our expectation for net interest income to increase in coming quarters; noninterest income, including service charge income, mortgage lending income, trust income, income from bank-owned life insurance, net FDIC loss share accretion income; other loss share income and gains on sales of foreclosed assets, including foreclosed assets covered by FDIC loss share agreements; noninterest expense; our efficiency ratio; asset quality and our various asset quality ratios; our expectations for provision expense for loan and lease losses; net charge-offs and our net charge-off ratios for both non-covered loans and leases and covered loans; 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; possible purchases of additional bank-owned life insurance; the opening and relocating of banking offices; our plans for traditional mergers and acquisitions; our goal of making additional FDIC-assisted failed bank acquisitions; other opportunities to profitably deploy capital and our positioning for future growth and profitability. You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call. For a list of certain risks associated with our business, you should also refer to the forward-looking information caption of the Management's Discussion and Analysis section of our periodic public reports, the Forward-Looking Statements caption of our most recent earnings release and the description of certain risk factors contained in our most recent annual report on Form 10-K, all as filed with the SEC. Forward-looking statements made by the company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Now let me turn the call over to our Chairman and Chief Executive Officer, George Gleason.

Good morning, and thank you for joining today's call. We're very pleased to report our excellent third quarter results. Net income for the quarter just ended was our third best quarterly net income ever. In each of the 2 prior quarters, in which we reported higher net income, we benefited from 2 FDIC-assisted acquisitions with significant bargain purchase gains. Highlights of the third quarter were numerous. Our net interest margin continued to be among the best in the industry and actually improved 13 basis points from the immediately preceding quarter. Noninterest income included record income from service charges on deposit accounts and excellent mortgage lending income. We achieved good growth in non-covered loans and leases, giving us our fifth consecutive quarter of growth in non-covered loans and leases. Several of our asset quality ratios improved to their best levels in over 4 years. While our third quarter results were very good, we are even more pleased with how well positioned we are for future growth and profitability. Let's look at some details. Net interest income is traditionally our largest source of revenue and is a function of both the volume of average earning assets and net interest margin, both of which increased in the quarter just ended. This combination helped us achieve a $2.1 million, or 5.1%, increase in our third quarter net interest income compared to this year's second quarter. As a result of our growth in non-covered loans and leases during the third quarter, earning assets increased to a quarter end total of $3,117,000,000 at September 30, 2012, which was higher than the average balance of earning assets for the third quarter as a whole. Our non-covered loans and leases grew $51 million during the third quarter of 2012. That's a solid result for the quarter, but our…

[Operator Instructions] Our first question will come from Jennifer Demba with Suntrust Robinson Humphrey.

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

Okay. Yes, we are -- we've been very active in that arena since early in the year, with the creation of a new position of Director of Mergers and Acquisitions, so -- which is Dennis James' position. Dennis has been out very actively involved in a number of markets meeting bankers, meeting investment bankers and looking at a number of opportunities. So I would say we've looked at something probably in the teens in a number of transactions so far. Dennis has assisted in that by various personnel and our corporate command staff who are running numbers and helping them do analysis and models on that. So we've been very active. The Genala Banc is the first agreement that we've gotten signed. We are actively looking at other opportunities on an ongoing basis and expect to continue to do so. So we think it will be a meaningful area of opportunity for us in future years. Obviously, there are too many banks in the country and there a lot of banks who, particularly smaller banks, under growing regulatory burden and profitability challenges in this low-rate environment who are looking for a good partner to join up with, so we think there will be numerous opportunities there. And we like the transaction that we've got signed up as our first transaction. It's small, but it's a very nice little bank that's high-quality bank and with a really good market share, so we're positive about that. In regard to geographic focus, we are looking primarily in the same footprint that we are looking for FDIC-assisted acquisitions primarily. And the first focus there is really the 7 states in which we're already operating: Arkansas, Texas, Georgia, North Carolina, South Carolina, Alabama and Florida. We are also secondarily looking in the 5 other states that have been the other part of our main focus of FDIC-assisted acquisitions: Tennessee, Virginia, Kansas, Missouri, Oklahoma. And we would look at acquisition opportunities outside of those 7 and those 5, those 12 states combined. But most likely, any traditional M&A activity we do is going to be focused in those 12 states and primarily in the 7 states where we already operate.

The deal in Alabama was very small, was there -- is there a cap on how large a deal you'd be willing to do at this point or is it just a case-by-case basis?

It's purely a case-by-case basis and going to be driven by our ability to generate return on equity in the transaction. With the capital position that we've got right now, we could make $2,460,000,000 of acquisitions and still have a bank-level Tier 1 leverage ratio of 8% or more, so we have tremendous capacity to add to our balance sheet, and we're looking at transactions of all sizes. And we'll go where the opportunities are. If the transactions are small and they generate our target return on investment and our meaningful addition to our franchise, we'll be glad to score runs by doing a lot of singles. If we can do larger transactions that, since we're in playoff season for baseball, would be doubles or triples or homers, we'd be glad to do those as well, but we're really driven by the economics of each transaction, not the size.

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

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

Next we'll go to Dave Bishop with Stifel, Nicolaus.

George, just curious in terms of the loan growth, some of the tenor there. Assuming a decent amount continues to come from the Real Estate Specialty Group, I was wondering, maybe if you can just give us some color there in terms of the breakdown, in terms of the growth and how the portfolio are shaked out in terms of quarter end.

Yes. The growth in the quarter included a few shifts. We were up very slightly in our residential 1 to 4 portfolio, just a fraction of a percent. Our CRE portfolio, we had about $8 million of growth there, but it actually declined in percentage terms, about 0.6%. Our construction and development portfolio was up about $45 million. That was a 1.6% growth in construction and development, now includes about 28% of the total portfolio, up from 26.4% at June 30. Modest decline in agri. We were down about $10 million in multifamily that went from 5.8% to 5.2% of the portfolio, and then some other negligible changes. So I guess the real story for the quarter is construction and development went up and multifamily went down a little bit and CRE was up a few million dollars, $8 million, but down in percentage terms. So not a ton of change and nothing surprising there, given our prior disclosures regarding the unfunded balances that we had outstanding at June 30, which, of course, is largely construction and development loans. The state of originating office shifted a little bit. Actually, Texas, in kind of a statistical anomaly, went down a little bit, from 43.47% to 43.14% of the total. North Carolina went up 20 basis points to 3.99% of the total. Arkansas was down 102 basis points, to 51.01%. And Georgia was actually up 116 basis points, and Georgia now accounts for 1.78% of our non-loss share loans. And that's consistent with the comments I made about beginning to have a more offensive-minded focus in the Southeast. We are seeing some improvement in some of those markets and as our lenders in those markets get less eyed up in dealing with resolution on some of the loss share loans, they're are having more time to go out and seek new opportunities and look for new opportunities. That shift in their mix of their allocation of their time combined with the July opening of our Real Estate Specialties Group office in Atlanta has contributed to some positive growth in our Georgia markets.

Next, we'll go to Matt Olney with Stephens.

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

Yes, it has. And that's why we gave -- we've given our guidance in -- when we've given it in quarterly terms, we've always said it would be an average quarterly result for the year because we did expect some lumpiness in that number and, yes, I think that continues. This $697 million of unfunded loan commitments we've got is -- that's a big number, obviously. And that's a big pool of loans that are closed, that are already on the books, that the funding is just waiting for the customers to put in their equity. And, of course, those projects are under way so they're contributing their equity. But to give you a little more color, and I'll do this and I'm going to round these numbers off to the nearest million dollars, but in 2013 if we project out all of the fundings that we expect on our closed loans just for Real Estate Specialties Group, which is about half of our portfolio and probably something on the order of 80%, I would guess, 75%, 80% of our unfunded commitments are at Real Estate Specialties Group, but if we project out that and project that all the repayments on loans and what we think would be the normal cycle for payoffs of loans that get booked, developed, stabilized and go secondary market or insurance companies or something, the Real Estate Specialties Group alone has first quarter 2013 fundings of just under, fractionally under $70 million net funding, just under $80 million in the second quarter, just over $91 million in the third quarter of next year and just over $84 million in the fourth quarter of next year. So if you add that up, I think that is $325 million, if I added it up in my head…

George, that's helpful. And just to clarify, those numbers you gave for quarter 4 next year, those included all the real estate offices, not just Dallas, is that right?

Dallas. That's just Dallas. That's Real Estate Specialties Group.

But does that include the offices in Austin and Georgia?

Yes. I'm sorry, yes, that's for the whole Real Estate Specialties Group. That includes Austin and Atlanta.

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

No. I think that's a reasonable statement. Certainly, the new loans we're booking do not yield as much as the covered loans that are running off. So given that, there is a downward bias and -- to that number. And you know that's why in January of this year when we gave our guidance for the year, we said 60525.80. We put the guidance in a descending order because we think that's the kind environment we're in. I'm very pleased that it looks like we're going to hold that margin well within that range, but we're going to be starting 2013 at a better point probably than most of our analysts probably predicted we would be ending 2012. So I think that's a positive, but yes, I think there is a downward pressure as covered loans roll off. I can't replace 8.90% yields even if we went crazy and bought Italian and Spanish bonds. So I don't know how to replicate those yields, but I am pleased with the relatively good yields we're getting versus what it seems a lot of our competitors are getting on the quality loans that we're putting on our books. I made note in the -- our prepared remarks that the spread between our legacy non-covered loans and our cost of interest-bearing deposits in the quarter just ended was 5.53%. So we're maintaining a really good core margin and we continue to be very focused on maintaining that margin.

Your next question will be from Kevin Reynolds with Wunderlich Securities.

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

Well, what I said in my prepared remarks was that we have -- our goal was to grow our balance sheet and grow revenue while maintaining noninterest expenses at or near the level we achieved -- achieved over the last several quarters. And the third quarter noninterest expense level, I think, was just about the same, within $100,000 of the first quarter first of non-interest expense level this year, obviously up from Q2 when we had a lower number. We've got a lot of things that contributed to those higher expenses in Q3 versus Q2. Some of them are ongoing, some of them are kind of just normal ebbs and flows in those numbers. I don't think we're going to be able to get back probably in Q4 anywhere near the Q2 level. I'm hopeful that Q4 is going to come in somewhere pretty close around to the Q3 level. We may be able to come in under the Q3 level. I think that's a plausible scenario and we're working hard to do that. We've got a lot of things going on. We've really launched a whole bunch of initiatives this year. I think our IS [ph] guys told me that they're working on 52 different ongoing projects to upgrade our IT infrastructure and speed and efficiency of our systems, security of our systems, telecommunication enhancements and so forth, so we are spending some money on those. Some of that's capital expenditures but a lot of it's personnel and consultant cost and so forth. And that tended to increase operating expenses to a pretty high level in Q3. We are really pushing hard to bring to a head a lot of the more problematic assets that we've acquired in these loss share transactions. That is accelerating some loan collection and…

A couple of other questions that are, I guess, a little bit more conceptual. When you talk about the capital that you've built up over the last several years. It's now, I think you said, 12.25 TCE ratio. Even with the loan growth that you've had and with acquisitions, you're still building capital faster than you can deploy at this point. And it seems that, that ratio might keep building even with the targets that you have for 2013 and 2014. What do you plan on doing with the capital as you build it. Because obviously, if that number continues -- that ratio continues to rise, it becomes harder and harder for you to achieve the rates of return on that capital in each successive quarter. I mean, might you have a higher dividend payout at some point or do you think that there's going to be a pickup in M&A activity that will help you deploy that capital?

Kevin, that's a great question. And I don't know that I can really answer that. M&A activity is certainly an opportunity. FDIC-assisted acquisitions are certainly an opportunity. And it's very difficult to handicap the timing, the magnitude of transactions or the existence of those. When we -- before we started doing FDIC deals, we were talking about doing FDIC deals, we ended up doing 7 so far. And before we did the first one, it was impossible to know if we were going to do 1 or 10. You just couldn't know. And the same thing is true now. It's impossible to know how many additional FDIC deals we'll get, how many additional M&A deals we'll get. I do have an optimistic view on both those fronts, FDIC acquisitions and traditional M&A. We're very actively engaged in looking, seeking opportunities in both. And my most earnest hope is, is that we'll have loan growth that will come in ahead of our guidance that will utilize more capital. And obviously, from the detail I gave earlier regarding just the Real Estate Specialties Group projected pipeline for 2013, it seems very plausible that if we can keep the momentum that we've got going right now that we could exceed those growth guidelines in a meaningful way in 2013 and 2014. And I'm spending a tremendous amount of my time and energy talking with lenders, pressing them to pursue high-quality opportunities in their market and get growth at a high level with high quality, with good margins. But that has become one of the most significant focuses of my time in recent months and will continue to be. So I'm hopeful, as I said in the call, that we will find meaningful ways to deploy that capital in a high ROE-type scenario. And as I said in the last couple of calls, for me, the most important thing is not how quickly we deploy that surplus capital but how profitably we deploy it. We're going to maintain our discipline about doing that.

Okay. And then I guess that last question I want to ask, I think, was your discussion with Matt just a second ago. I know that the net interest margin is the result and not the driver. But when you talked about their being downward -- in expectations there was a downward bias on the NIM in 2013 and 2014 with covered loan runoff. How would you expect to offset that going forward? I mean, that's a downward bias with your existing goals and -- for loan originations, I think, is the way I interpret it. How much would you offset that? Would it be with sort of an improvement in the efficiency ratio as those loans pay off and special assets folks get re-purposed in the organization?

Well, certainly that is a potential cost savings to eliminate loan collection and repo expense. And if we don't make additional FDIC-assisted acquisitions, then there are people working on those transactions now that will fill other growth roles in the future of our company. And there are special assets people now who became special assets people because they were needed to be special assets people that will go back into a more offensive mode. But I think, really, the key to offsetting some margin compression is to be more efficient. The key there is we've got 116 offices. We could be a $6 billion or $7 billion or $8 billion bank with that number of offices. We've just got tremendous capacity for growth within our existing office network. So say we get to $7 billion in assets through growth over whatever period of time that is and say our number of offices grow from 116 to 125 or something over that period of time, assuming that's several years out. And you're running a $7 billion bank with 125 offices versus a $3.8 billion or whatever we are with 116 offices. Clearly, there's massive efficiency improvements that come from that evolution of your company. So yes, we think efficiency is a very important part of our future growth story. Not that we're going to cut costs, but we're going to achieve substantial growth with just very minimal additions of variable cost as we grow.

Next, we'll go to Michael Rose with Raymond James.

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

I've always said, well, I can predict mortgage income for about 4 weeks, and my ability to predict beyond that is fairly limited. But I will comment that we added a lending team down in Southlake, Texas. We're adding mortgage lenders in other markets. We're having discussions with other individual lenders and teams of lenders now that might join our mortgage operation in future quarters, so we're hopeful in regard to that. We're in, of course, an environment where rights are near or at historic lows multi-, multi-decade lows. So we are seeing a fair amount of refinance activity. So far this year, 60% of our total volume in mortgage has been refinanced volume. That number was 61% in the quarter just ended. At the same time, the volume of activity we've seen from home purchases has grown. In the first quarter, we originated a little over $16 million of mortgage loans or home purchases. In the second quarter, that number jumped to almost, well, a little over $27 million. And in the third quarter, that number jumped to almost $30 million. So we've seen a positive trend in home purchase activity as well as a continued high level of refinance activity. We are adding staff, housing markets particularly in Arkansas, Texas and Charlotte seem to be getting quite a bit better. So we're optimistic that we'll see continued growth in purchase activity. We'll have continued addition of staff members and with rates staying low for an extended period of time, we'll have a continued refi market. So we're optimistic about our prospects and mortgages for a number of reasons but at the same time, from observing the mortgage business and being in the mortgage business for a long, long time, I can tell you there's just not a lot of visibility very far out because it just doesn't take a lot to move that volume of business one way or the other.

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

Yes, the -- it's going to be hard for us to do any acquisition that's not going to erode our margin a little bit, because we've got a really, really good margin that -- it's very unlikely we're going to buy a bank that has a better margin than we do, just because there aren't many. So yes, that guidance does allow for the fact that, yes, we'll have some margin attrition, assuming this transaction closes from the transaction. But it will be additive to earnings in other ways and will be accretive even with the dilution of the margin, will be accretive, we believe, to earnings per share in 2013 and 2014 and for years to come. It looks pretty consistently accretive, the way we project it.

Next, we'll go to Derek Hewett with Keefe, Bruyette & Woods.

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

Derek, I don't have an average. Obviously, that number blended up. I mentioned in the July call that some of the normal ebbs and flows of prepayments and payoffs and accounting adjustments and various things had tended to dink our second quarter net interest margin a little bit and that I thought we would more likely be a few basis points higher on margin in Q3 than we were in Q2. And those -- some of those things that sort of dinked our margin in Q2 a little bit just went the other way and normalized in Q3. I would say that the Q3 interest rates on non-covered loans, I would consider that to be a fairly normalized interest rate for the quarter. There were not negative or positive things in that, that I'm aware of or were focused on that tended to cause it to be up or down and Greg is not in affirmatively over there too, that he's not aware of anything. So I think that is a good number for your starting point. Now you can project what you want to project going forward where you think that goes. But I think the 3Q number is a good starting point. And it's a good starting point, frankly, for the non-covered, the loss share loans as well. So I would use Q3 as your starting point and kind of work from there as to where you think it goes. Obviously, we're pleased with the fact that we've got a 5.53% what I would refer to as core margin, spread between our legacy non-loss share loans and our cost of interest-bearing deposits. So we think that spread is very healthy and we're going to fight to maintain that spread, as I said earlier, at the highest level we can. Will there be some attrition on that spread? Probably, if we stay in this kind of rate environment, over time, yes, that spread probably gives up a little bit. I don't think it's a lot. And you get a little attrition in the margin from the shift from loss-share loans to non-loss-share loans. But starting out with a core spread of 5.53% is not terribly far from that 5.97% margin number. And so we're pretty optimistic that our margin's going to hold up at a really good level both in absolute terms and relative to the industry for a long time to come.

Our next question will be from Jeff Bernstein with AH Lisanti.

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

Well, it varies depending on the type of product and the market in which it is, the size of it, the degree of it. It just -- it varies so much from transaction to transaction that I don't know that I can actually give you meaningful guidance. It's all over the board depending on the type and structure of each transaction. As Derek noted, our yield on our non-covered loans was actually up last quarter. I've addressed that. I think that yield is certainly reflective of the type of loan book we have. It's a reasonable indicator of where that book is yielding. The average yield that's 5 -- what is it, Greg -- 5.86%, I think, whatever that number is, 5 86. The yields on new loans we're putting on is less than 5.86%. I'm fairly confident in saying that, but it's not -- we're getting a lot of loans booked in the 5s and 5 -- with 5 handles on them. And some with 6 handles on them. Although I would say 5 is the predominant handle, whether it's 5.25%, 5.5% or 5.75% or 5.95% and we're doing loans that also have 4 handles on them in certain situations or extremely favorable transactions. So it's all over the board and predominant yields were somewhere in the 5s.

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

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

Next, we'll hear from Blair Brantley with BB&T Capital Markets.

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

Blair, that is really good question. We had -- July was probably right in line with our expectations and September was probably right in line with our expectations. The magnitude of paydowns in the month of August was almost twice, not quite twice what we would have expected for the month. So I've been through that. We had more transactions pay off, pay down and resolve in August than I would have expected. And honestly, I really can't add a lot of intelligent comment beyond that. I don't know whether that is a one-month phenomenon that just occurred in that one month. It was not evident in July and September, obviously. I don't know whether we end up with a similar pattern in future quarters, where we have 2 months that are in line with expectations and then one accelerated paydown or that actually could go the other way. So many of these loss share loans that are not going to end up blowing up and defaulting and being liquidated that are getting repaired and rehabilitated. A lot of those loans are going to end up staying on our books longer than we would have -- that you would -- than you would anticipate if you were just projecting, gosh, a 5-year runoff or a 4-year runoff or whatever of the whole portfolio. A lot of those are going to stay on the books for a long period of time. So at some point -- and I really can't tell you when this is going to occur because I just don't know when it's going to play out. But at some point, the runoff rates from the portfolios are going to slow dramatically because we're going to get down to a point where we liquidated all the junk that has to be resolved and foreclosed and liquidated out. And there's a residual amount of remaining loans that were either good loans from the get-go or have become good loans by the customers improving the performance, paying the loan down, pledging additional collateral, whatever, and those loans become ongoing pieces of our book. So I think we may see a combination of 3 scenarios going forward quarter-to-quarter. We may see a quarter like we did last quarter where we have a month that has unusual paydowns and it appears that it speeds up. And we may have quarters that look very normal, consistent with our sort of expectations. And then we may reach a point in time in the future where the runoffs begin to diminish noticeably and the volume stays on the books longer because these loans that are still there are getting fixed and are of good quality.

Our next question comes from Brian Martin with FIG Partners.

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

Well, we're trying to do transactions and much like with the FDIC-assisted transactions, both FDIC-assisted and traditional M&A where we'll have a high teens to low 20s return on equity from the transaction, so it's really pretty simple. We're just -- we don't want to do things that are going to yield us a low ROE even if they yield incremental profits. I could go out and do a lot of transactions with our stock price where it is that would certainly be accreted to earnings per share. But they would use up our capital in ways that I don't think would maximize our ultimate longer-term return. So we're trying to do transactions that would have sort of a 20% plus-or-minus ROE. And when I say 20%, I'm thinking kind of 17% to 23% top ROE range that will contribute that kind of result longer term. And that's generally been the way we've modeled and looked at all of the opportunities we're looking at.

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

We actually had a -- several guys that work with me to draft the conference call script, we had a lengthy discussion about should we flip the order of those at this point. And it was sort of a tie vote as to whether one was more likely than the other. And there was a difference of opinion among our group, so we left it in the same order we had communicated it previously, but that's a really good question. And reasonable men could differ on which should be number 2 in that pecking order and which should be number 3. Obviously, if we get out here at quarter 2 and haven't done an additional FDIC deal, and we get another traditional M&A bank deal under our belts, the guys who are advocating to change the pecking order of that disclosure are going to have the more favorable cards in their hand.

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

Well, the key to these guys is they're experience and knowledge and ability as a lender. You -- whenever you hire a new lender, you hope that, that new lender is going to help people and have relationships that will want to follow him. But we've really never hired lenders so much based on those relationships or what book of business they had at a prior bank because they got to leave all that data behind and all that information behind and just go out and start from scratch building a new portfolio. But we've hired a couple of guys to our -- additions to our team in Wilmington, one in Bluffton, one in Mobile. We've added some lenders in some of our legacy markets as well. We're constantly trying to build a team. And just like any professional sports franchise, they are -- they're always look to add guys that bring new skills, ability and talent to the team. And if you've got guys that are not performing like you want them to, you got to cut those guys from the team so you can make a place on the bench for somebody with more talent and ability. So we're doing that very actively and I think we've made some really good hires and we've got some more discussions going on with others. So we think that those will translate into additional growth for us in those markets in the next year or 2.

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

Well, we gave guidance at the beginning of the year that we expected our provision expense in 2012 would be less than in 2011. Obviously, we've commented in several conference calls that we don't mind provisioning when we're provisioning for expansion of the portfolio and growth in high-quality loans. So what provisions will look like next year is really going to be a function of 2 things. One is the growth in the portfolio, which I hope pushes us toward higher provisions just because we've got mega growth. And a reduction, I think, in allocated allowance amounts and so forth resulting from better asset quality. So those things tend to cut 2 directions, the improving asset quality trend that I think will continue to bode for a lower reserve percentage, a lower allowance allocation percentage as a percentage of loans. But at the same time, growth in the portfolio, if we can achieve as much as I hope to, would actually cause provisioning expense. So you just have to run your model and project the growth in there. But I do think the allowance allocation percentage will continue to decline next year because I think we are just continuing to see things that we've got specific reserves and allowances set up for now get better and heal up and either get well and no longer require specific allowance, or get liquidated and pushed off the books and eliminate the need for the specific allowance that way.

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

No, some of these loans are performing better than projected and there's additional discount in there getting accreted into income on them. And as best I can tell, and the accounting for these things is fairly involved and complicated, but as best I can predict it, I'm thinking that our third quarter rate on that is going to be pretty close to where we're going to be for the next couple of quarters on that. Maybe a little bit of a downward drift to that but not a ton, I don't think. And if they continue to get further improvement in performance out of them and have more accretion, that number possibly could go up a little bit. So we're just going to have to kind of see how those play out and it's going to depend on the performance of those portfolios.

And we'll go to our last question in the queue at this time, which is from Peyton Green with Sterne Agee.

George, a question for you on the covered loans. What was the balance of accretable yield at the end of the quarter versus the non-accretable discount?

Well, that will be in the Q. We don't have that number available to us right at the moment, so I'm sorry about that.

No, I mean, just directionally. Do you get a sense that non-accretable moved into the accretable over the course of the quarter?

Some -- possibly. I don't know. Let us get the numbers in the Q and give you a disclosure in the Q on that.

Okay, great. And then last question, with regards to M&A, I mean, how would you characterize the landscape today compared to 1 year ago or even 2 years ago? I mean, is it -- are there many more opportunities? And then secondly, what's your capacity? I mean, how many deals could you handle at one time?

We would -- we've got the capacity to handle multiple transactions at once and we gained a lot of experience and ability as we tested our troops in the FDIC environment. And as you well know, we did 2 acquisitions in a single day there, and I think we had 3 ongoing conversions going in different stages of progression at once there. So we would be very comfortable with 2 or 3 or 4 transactions going through the pipe at one time at various stages of development and closing and conversion process that -- it wouldn't bother me at all to have 4 transactions in a pipe at once now. Who knows if we would ever be able to back enough successes in a short enough time period that we would have 3 or 4 going at once, I don't know, but we -- we're trying. We're bidding and we're doing underwriting in due diligence and exploring opportunities constantly. So if we get fortunate and manage to have a good successful run of hitting transactions, we would -- we'd be comfortable doing multiple at once.

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

I don't know. We're -- we'll have a little more clarity on that in the coming quarters. By -- I would suspect by this time next year, we would really be able to give you a really good accurate answer on that. There is still, I mean, some of these portfolios, we've only been in them 18 months. So there's still a lot of questions about whether certain loans are going to heal up and become long-term viable customers or are they going to be something that never gets to a point we're really comfortable with it. There's a goodly number of relationships in these portfolios that are on the bubble now. We have assumed in our valuation of those assets that they all go in sort of an adverse sort of way. But we are seeing a lot of relationships where customers are stepping up and fixing problems and addressing things in a way that makes us want to continue a long-term relationship with them. And I think we'll have a fair amount of color on that, how that plays out, by this time next year. But it's a little too early to know for sure to give any meaningful guidance on that.

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

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

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