Q3 2014 Bank of Ozarks Inc Earnings Call

OZRK.OQ - Bank of the Ozarks
Q3 2014 Bank of Ozarks Inc Earnings Call
Oct 15, 2014 / 03:00PM GMT 

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Corporate Participants
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   *  Susan Blair
      Bank of the Ozarks, Inc. - EVP IR
   *  George Gleason
      Bank of the Ozarks, Inc. - Chairman, CEO
   *  Greg McKinney
      Bank of the Ozarks, Inc. - CFO, CAO

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Conference Call Participants
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   *  Kevin Reynolds
      Wunderlich Securities, Inc. - Analyst
   *  Michael Rose
      Raymond James & Associates, Inc. - Analyst
   *  Jennifer Demba
      SunTrust Robinson Humphrey - Analyst
   *  Peyton Green
      Sterne, Agee & Leach, Inc. - Analyst
   *  Blair Brantley
      BB&T Capital Markets - Analyst
   *  Brian Martin
      FIG Partners, LLC - Analyst
   *  Stan Westhoff
      Walthausen & Co. - Analyst
   *  David Bishop
      Drexel Hamilton - Analyst
   *  Brian Zabora
      Keefe, Bruyette & Woods, Inc. - Analyst

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Presentation
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Operator   [1]
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 Welcome to the third-quarter 2014 Bank of the Ozarks, Inc., earnings conference call. My name is Jeanette and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Susan Blair. Ms. Blair, you may begin.

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 Susan Blair,  Bank of the Ozarks, Inc. - EVP IR   [2]
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 Good morning. I am Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the Company's results for the quarter just ended and our outlook for upcoming quarters.

 Our goal is to make this call as useful as possible in understanding our recent operating results and outlook for the future. To that end, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates, and outlook, including statements about economic, real estate market, competitive, credit market, and interest rate conditions; revenue growth; net income and earnings per share; net interest margin; net interest income; noninterest income, including service charge income, mortgage lending income, trust income, net FDIC loss share accretion income and amortization expense, other income from loss share and purchase noncovered loans, 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 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 non-purchased loan and lease portfolio; growth from unfunded closed loans and growth in earning assets; changes in expected cash flows of our covered loan portfolio; changes in the value and volume of our securities portfolio; conversion of our core banking software; the opening, relocating, and closing of banking offices; our expectations regarding recent mergers and acquisitions and our goals for additional mergers and acquisitions in the future; and changes in growth in our staff.

 You should understand that our actual results may differ materially from those projected in these 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 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 statements based on the occurrence of future events, the receipt of new information, or otherwise.

 Any references to non-GAAP financial measures are intended to provide meaningful insight and are reconciled with GAAP in our earnings press release.

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

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [3]
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 Good morning and thank you for joining today's call.

 We are very pleased to report our excellent third-quarter results. Highlights of the quarter included record organic loan and lease growth, record growth in our unfunded balance of closed loans, record net interest income, record service charge income, record trust income, and excellent asset quality.

 In addition to posting stellar financial results for the quarter, we accomplished many other tasks in the quarter just ended, including the completion of our legacy bank core systems conversion project, completion of our annual joint regulatory exams for safety and soundness information system and trust, completion of our annual FDIC loss share audit, and the completion of a selection and contract negotiation process for a new document loan system and a new consumer loan automated underwriting system. Not letting up on the pace of progress over the first weekend of October, we completed the core system conversion project for our Bancshares acquisition. It has been a very busy last few months and we have a lot to talk about, so 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. In the quarter just ended, our non-purchased loans and leases, which excludes covered loans and purchased noncovered loans, grew a record $468 million. This follows record growth of $393 million in this year's second quarter. During the first nine months of this year, our non-purchased loans and leases have grown $1.01 billion, well above the latest upwardly-revised minimum growth guidance for the full year.

 Perhaps more impressively, our unfunded balance of closed loans increased a record $751 million during the quarter just ended and now totals $2.58 billion. During the first nine months of this year, our unfunded balance of closed loans has more than doubled, increasing $1.37 billion during that nine-month period. While some portion of this unfunded balance will not ultimately be advanced, we expect the vast majority will be advanced. This has favorable implications for future growth in loans and leases for the remainder of this year and in 2015.

 We are consistently and constantly striving to enhance our capabilities to produce increasing volumes of good-quality, good-yielding earning assets. As a result, we believe we are strategically positioned for even stronger growth in earning assets in the years to come.

 In previous conference calls, we have discussed our five engines for growth in earning assets, apart from acquisitions. The strongest of these five organic growth engines is real estate specialties group, which has contributed the majority of our organic growth in recent years and did so again in the quarter just ended. This unit is well known from our numerous discussions in previous calls and presentations. We believe real estate specialties group will continue to be our strongest engine for organic growth in earning assets for some time to come.

 With that said, we continue to believe that our other organic-growth engines will contribute more to growth in earning assets in future years than in recent years. These other growth engines include our vast network of community banking offices in seven states, our leasing division, our relatively new corporate loan specialties group, and our investment securities portfolio. With the exception of our investment securities portfolio, each of these other organic-growth engines made positive contributions to our growth in earning assets in each of the first three quarters of this year.

 We seem to be hitting on all cylinders and our third-quarter results actually show an acceleration of our loan and lease growth for community banking and leasing.

 A great deal of work has gone into building the talent and the infrastructure needed to make all five of our organic-growth engines effective. The geographic and political -- product diversity of our different growth engines are significant factors in our optimism regarding our ability to achieve increasing levels of growth in earning assets in 2015 and beyond.

 We have exceeded our original and revised guidance for non-purchased loan and lease growth for 2014. We expect another good quarter of non-purchased loan and lease growth in the fourth quarter, providing a solid finish to 2014.

 In 2015, our goal is to achieve growth in non-purchased loans and leases exceeding our 2014 growth. Obviously, that is a much bigger number than we have previously discussed. Given our current momentum, including our substantial unfunded balance of loans already closed, we believe that is a reasonable goal.

 While we are very pleased with our growth, we are even more pleased with the credit and interest-rate risk profile of the loans and leases we have booked. We have been operating in an intensely competitive environment in which some competitors have been, in our judgment, taking on excessive credit and excessive interest-rate risk to generate volume. In contrast, we believe our lending teams have been maintaining sound pricing and credit discipline.

 During the quarter just ended, we obtained large amounts of cash equity in most new loans, continued to require appropriate risk-adjusted pricing, and actually increased our percentage of variable-rate loans, which now comprises 69.9% of total non-purchased loans and leases. That is up from 68.5% at June 30 of this year and 62.7% at December 31, 2013.

 As you can see from the decline in our net interest margin, we are not totally immune to the effects of this very competitive pricing environment, but our team seems to be doing relatively well. It takes hard work and great discipline to achieve our loan and lease growth while adhering to stringent credit risk and interest-rate risk standards, but we believe our discipline will distinguish us in a very positive way in the future from banks which may have disregarded conservative credit and interest-rate risk standards in order to achieve growth.

 In regard to net interest margin, our third-quarter net interest margin on a fully taxable equivalent basis was 5.49%. In our recent conference calls, we provided guidance that we expect our 2014 net interest margin to decline, but that the year-over-year decline from 2013 to 2014 was expected to be less than the 28 basis points of decline in net interest margin from 2012 to 2013.

 For the full year of 2013, our net interest margin was 5.63%, and for the first nine months of 2014, our net interest margin has been 5.52%, just 11 basis points below our net interest margin for the full year of 2013. Based on this, it appears that we are on track to come in well within our guidance for net interest margin.

 Given the continued decreases expected in our balances of high-yielding covered loans, and considering the very low-rate, ultracompetitive environment in which we are operating, we expect another year of declining net interest margin in 2015. At this point, we expect the 2015 decline in net interest margin to be somewhat similar to the declines in net interest margin we experienced in 2013 and are currently experiencing in 2014.

 We continue to expect that our cost of interest-bearing deposits will increase slightly in coming quarters as we continue to accelerate deposit-gathering activities to fund expected future loan and lease growth. During the quarter just ended, our cost of interest-bearing deposits increased two basis points, from 21 basis points to 23 basis points. During the third quarter, we accelerated our spin-up deposit-gathering campaign, with 25 of our 165 offices now in spin-up mode.

 Because of the excellent loan and lease growth achieved in the quarter just ended and our increased expectations for loan and lease growth in the quarters ahead, for the remainder of this year and the full year of 2015 we now expect that we will need to achieve greater deposit growth in coming quarters that we had previously modeled. This increased growth is very positive for us, but it will also mean somewhat higher cost of interest-bearing deposits.

 Over the next five quarters, we expect the cost of interest-bearing deposits will increase each quarter by somewhere between one and five basis points per quarter. Of course, that expectation is factored into our previously mentioned net interest margin guidance. Our net interest margin guidance does not take into account the effect of any future acquisitions.

 Let's shift to noninterest income. Income from deposit account service charges is traditionally our largest source of noninterest income. Service-charge income for the quarter just ended was a record $7.36 million and increased 26.5% compared to the third quarter of 2013.

 Of course, acquisitions have been significant contributors to this growth, but even excluding acquired deposits, we have continued to grow core deposit customers in the first nine months of this year, adding approximately 7,022 net new checking accounts so far in 2014. And again, that number excludes deposits acquired in acquisitions. Clearly, our good growth momentum has not been limited to loan and leases.

 Mortgage lending income for the quarter just ended increased 35.4% compared to the third quarter of 2013, but for the first nine months of 2014, mortgage lending income has decreased 18.3% compared to the first nine months of 2013. After a slow start in the first quarter of this year, we are pleased to see an improving trend in mortgage lending income over the last two quarters.

 Trust income for the quarter just ended was a record $1.42 million and increased 33.9% compared to the third quarter of 2013 and 4% compared to this year's second quarter. Our trust business grew substantially with the July 2013 FNB Shelby acquisition and we have continued to achieve organic growth. The recent Summit acquisition included a small book of trust business, which has contributed modestly to trust income in recent months.

 Net gains from sales of other assets were $1.69 million in the quarter just ended, compared to $2.50 million in the third quarter of 2013 and $1.45 million in the second quarter of this year. In recent years, such net gains have been a meaningful contributor in every quarter. We expect that net gains will continue to be a significant income item for quarters to come, but, by its nature, this category will tend to vary quite a bit from quarter to quarter.

 Our significant reductions in OREO in recent years and notably in the quarter just ended suggests that over the next couple of years, we will probably see a declining trend in this income line item.

 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 net present values and such net discounts are accreted into income over the relevant time periods. In the most recent two quarters, this category has flipped to net amortization expense, being a net amortization expense of $0.56 million in the quarter just ended, compared to net accretion income of $1.40 million in the third quarter of 2013 and net amortization expense of $0.74 million in this year's second quarter.

 This change reflects the continued evolution of a phenomenon we've discussed at length in recent calls. As we have more experience with our portfolios of covered loan and as these portfolios become more seasoned, we are increasingly revising upward the projected cash flows on certain loans where we originally expected an elevated risk of loss, but no longer believe that such loans have an elevated risk of loss. These are loans where principal reductions through amortization, unscheduled principal payments, provision of additional collateral, improvement in the obligor's financial condition and/or other factors have, in our view, largely eliminated any elevated risk of loss.

 The effect of these upward revisions is to accrete into interest income over the remaining life of the loan the previous non-accretable difference and to amortize against accretion income over the remaining life of the loan or the remaining loss share term, whichever is shorter, the related FDIC loss share receivable.

 This is the reason that our net accretion income of our FDIC loss share receivable declined in prior quarters and the reason it has changed to net -- from net accretion income to net amortization expense in the two most recent quarters. This is also the primary factor in the increase in the yield on our covered loans from 9.49% in the third quarter of last year to 16.28% in the quarter just ended.

 Based on the improving risk profile and greater seasoning of many of our covered loans, we expect to identify additional loans in the current quarter and future quarters for which it will be appropriate to upwardly revise our estimates of future cash flows. The net effect of this will be positive for net income since we will have an additional $1.25 of interest income for every $1 of reduced noninterest income related to amortization of the FDIC loss share receivable.

 In addition, noninterest income in the quarter just ended included other income from loss share and purchased noncovered loans of $3.37 million, compared to $2.48 million in the third quarter of 2013 and $3.63 million in the second quarter of 2014. This line item includes certain miscellaneous debits and credits related to the accounting for loss share and purchased noncovered loans, but it consists primarily of income recognized when we collected more money from covered loans and purchased noncovered loans than we expected we would collect. We refer to this -- these additional sums collected as recovery income.

 It is unlikely this will -- it is likely; I'm sorry. Excuse me. It is likely that this will continue to be a meaningful income item for many quarters to come. Because it can be significantly impacted by loan prepayments, other income from loss share and purchased noncovered loans will vary from quarter to quarter. The significant income we continue to recognize in this category, in large part, is a result of the skills, the hard work, and the achievements of the team we have developed to resolve and collect problem assets.

 Let's turn to noninterest expense. Our efficiency ratio for the quarter just ended was 43.9%, compared to 43.0% for the third quarter of 2013 and 44.6% for this year's second quarter. While our efficiency ratio will vary from quarter to quarter, especially in quarters such as the quarter just ended where we had significant unusual items of income and noninterest expense, we expect to see generally improving trend in our efficiency ratio in the coming years.

 Our expectation for improvement in our efficiency ratio is predicated on a number of factors, including our expectation that we will ultimately utilize a large amount of the current excess capacity inherent in our existing branch network; our expectation that our ongoing core system conversion projects will reduce software costs by approximately $2.75 million per year starting in 2015, while providing at the same time greater functionality for our customers and employees and creating other opportunities for enhanced operational efficiency; and our expectation for achieving additional cost savings from our recent acquisitions. Our guidance regarding improving efficiency ratio does not consider the potential impact of any future acquisitions.

 Our results for the quarter and nine months just ended were both significantly impacted by unusual items of noninterest expense. During the quarter just ended, we incurred software and other contract termination charges of $0.5 million; acquisition-related and system conversion expenses of approximately $2.2 million; and fraud losses of approximately $0.6 million, attributable to The Home Depot's systems breach. During the first nine months of this year, we have incurred software and other contract termination charges of $5.6 million, acquisition-related and system conversion-related expenses of approximately $3.7 million, and, of course, the $0.6 million of fraud losses attributable to The Home Depot system breach.

 By comparison, in both the third quarter and first nine months of 2013, we incurred approximately $1.4 million of acquisition-related expenses.

 We have incurred significant unusual items of noninterest expense in each quarter of 2014, including the total $3.3 million in the quarter just ended. The unusual items of noninterest expense incurred so far this year relate primarily to our Bancshares and Summit acquisitions in the first and second quarters and our significant core software conversion projects and related contract termination charges.

 We will incur additional unusual items of noninterest expense in future quarters related to core software system conversions and recent and future acquisitions. Specifically in the fourth quarter of 2014, we expect to incur costs related to our Bancshares core system conversion, which, again, we completed over the first weekend in October, and our Summit core system conversion, which we plan to complete in the second weekend in November. We also expect to incur certain charges related to closing eight overlapping Summit and legacy branches in November.

 In the first quarter of 2015, we expect to incur acquisition-related expenses in connection with the planned completion of our Intervest acquisition and additional costs in connection with the mid-February core system conversion of our FNB Shelby acquisition. In the second quarter of 2015, we expect to incur costs related to the core system conversion of Intervest.

 Notwithstanding our expectation of significant unusual items of noninterest expense still to come, we expect to see improvement in our efficiency ratio in 2015 as the magnitude of such unusual items of noninterest expense wanes and as the benefits of cost savings from our core systems' software conversion, operational consolidations, and branch closings are realized.

 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 our key asset quality ratios in the quarter just ended.

 At September 30, our ratio of nonperforming, non-purchased loans and leases as a percent of total non-purchased loans and leases was 49 basis points, compared to 41 basis points at September 30, 2013, and 58 basis points at June 30 of this year. Similarly, excluding covered loans, purchased noncovered loans, and foreclosed assets covered by loss share, nonperforming assets as a percent of total assets were 50 basis points at September 30 of this year, compared to 40 basis points at September 30 of last year and 62 basis points at June 30 of this year.

 Finally, our ratio of non-purchased loans and leases past due 30 days or more, including past-due nonaccrual loans and leases, to total non-purchased loans and leases increased to 63 basis points at September 30 of this year, compared to 54 basis points at September 30 of last year, but unchanged compared to 63 basis points at June 30 of this year.

 Our annualized net charge-off ratio for our non-purchased loans and leases for the third quarter of 2014 decreased to six basis points, compared to 10 basis points in the third quarter of 2013 and 19 basis points in the second quarter of this year. For the first nine months of this year, our annualized net charge-off ratio for non-purchased loans and leases decreased to 10 basis points, compared to 13 basis points in the first nine months of 2013.

 Let me close our prepared remarks with a few comments about growth in acquisitions. Organic growth in loans, leases, and deposits continues to be our top growth priority. And we have clearly demonstrated, I believe, our ability to achieve substantial growth apart from acquisitions.

 With that said, M&A activity continues to be another significant focus as we believe that M&A provides meaningful opportunities to augment our healthy organic growth. We are very pleased with the progress of each of our acquisitions, including our two acquisitions in the first half of this year. We continue to be active in identifying and analyzing M&A opportunities and we believe an active and disciplined M&A strategy will allow us to continue to create significant additional shareholder value. This potential is evident in our pending Intervest acquisition, which is expected to be nicely accretive to our book value per common share, tangible book value per common share, and diluted earnings per common share in 2015.

 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?

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Kevin Reynolds, Wunderlich Securities.

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 Kevin Reynolds,  Wunderlich Securities, Inc. - Analyst   [2]
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 Very good quarter and I guess I have a couple of questions. One is, with what we have seen in the marketplace recently, sort of fears of a global slowdown out there and we saw the 10-year drop pretty sharply this morning, do you get the sense as you look across your lending opportunities out there, the markets where your lenders are actually very actively engaged, is there any domestic slowdown that is going on right now that you can see? Or anything that would be out of the ordinary that might be reflective of what is going on in the marketplace?

 And then, a second question for you on M&A. You talked about needing to ramp up deposit growth to match the loan growth that you have seen and how that would have a little bit of a negative impact on deposit cost for the next few quarters. Is there a thought that the nature of acquisitions, if you start to target -- as you look out there, might change once you go from buying markets -- expanding into markets as opposed to -- or might you consider a deposit-rich acquisition to provide that funding base as a little bit of a different focus? So I will stop there. I'm not sure if that was a clear question or not.

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [3]
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 No, I understand exactly your question. The first question that you asked about have we seen an economic slowdown, really, we have not.

 Economic conditions continue to be improving. It seems like in most of our markets, we're still not in a robust recovery, by any means, but we are seeing generally more positive trends pretty much across the footprint. I mean, there are a few areas where they have lost employment and lost a major employer or something where recovery seems to have stagnated. But by and large, I think we are seeing generally improving trends. So these fears about Europe or slowing growth in China coming back in and really affecting our domestic growth, we have not seen that impact our markets, by and large, at this point in time.

 The second question you asked, would we look at more deposit-generating franchises and acquisitions as opposed to asset-generating franchises, and really, if you look at our live bank acquisitions, we have done a mixture of both. The Geneva, Alabama, acquisition and the FNB Shelby acquisitions are both acquisitions that are 100-plus, 139-year-old deposit bases, very, very strong deposit-oriented franchises that the ability to generate good-quality, good-yielding loans in those markets on average is probably going to get you to a 50% loan to deposit ratio, on average, between those two acquisitions. So those were very much transactions where we bought extremely valuable old vintage deposit bases at very advantageous prices.

 We have also done asset-generating acquisitions. The OMNIBANK acquisition in Houston, the Intervest acquisition that is pending are definitely transactions where instead of buying deposit bases, even though the OMNI has a 60-year-old history, those are transactions where we are really buying asset-generating potential and platforms and markets that we think have a great deal of potential. The Summit acquisition had some markets that were asset-generating markets and some markets that were deposit generating.

 So we are looking across a broad spectrum of acquisitions. We would buy additional asset generators if we could get them on terms that were accretive to our shareholders and positive we would buy additional deposit-based generators.

 If you look at the 92 markets in which we have deposit operations now, we own about 4% of the branches in those markets and we have about 1% of the deposits in those markets. And that reflects the fact that we have been extremely conservative in our deposit pricing and that we have only grown deposits as we have needed to grow deposits.

 But as I have talked about for a couple of years now, we have this tremendous growth potential for deposits inherent within our existing branch network. We have a good strategy that I believe is a very economical and efficient strategy for harvesting that potential, which we refer to as our spin-up strategy, and we think we have got capabilities to grow deposits for several years into the future with our existing branch network without needing to specifically target acquisitions that are deposit rich in their nature.

 With that said, we would gladly buy another Geneva. We would gladly buy another FNB Shelby-type transaction that was a 130- or 129- or 139-year-old deposit base that had great stickiness and great value to it. So we would definitely do that.

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 Kevin Reynolds,  Wunderlich Securities, Inc. - Analyst   [4]
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 All right. Thanks a lot, George. Good quarter.

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Operator   [5]
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 Michael Rose, Raymond James.

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 Michael Rose,  Raymond James & Associates, Inc. - Analyst   [6]
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 Just if we could start on the growth in unfunded commitments. Obviously, a record for you guys this quarter. Where is it really coming from? I know it is mostly real estate, or it is real estate specialties group, but is it -- are you approving more transactions? Are the transactions that you are seeing, are they getting better? Is it the expansion of some of the new offices? Can you just give us some context on where the growth in unfunded balances is coming, and then what your expectation might be for further acceleration from here?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [7]
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 The volume of transactions we are looking at has increased significantly. There seems to be a lot of good opportunities out there.

 That is, in part, just a result of us continuing to grow our customer base in offices like Dallas and Austin, in Atlanta where we have been for a while. It is also a result of the fact that we have got new offices opened in the last 16, 17, 18 months in New York, and then Houston, and then Los Angeles.

 So we are seeing a lot more transactions. Our approval and closing percentage is still running somewhere in that 6% to 8%, sub 10% of all the transactions we are looking at. We are continuing to be very particular and very targeted in what we are doing.

 But we close loans now in 40 states through real estate specialties group, over the last 11 years. So it is very much a national franchise. Certainly, the growth potential of it is helped by the new offices in LA and New York and Houston where we are having the opportunity to interact with more potential customers then we did in the past. We have got more boots on the ground and that is creating some additional opportunities.

 So all that, I think, is very positive.

 In response to your question of is this accelerating, obviously, it accelerated in Q3. I thought we had spectacularly good growth in Q2 in both the funded and the unfunded balances. And the guys buckled down and worked really hard in Q3 and beat those numbers fairly handily.

 And real estate specialties group was -- accounted for $309 million of our Q2 growth and $303 million of our Q3 growth in funded. Corporate loans specialties group, which accounted for $22 million of our growth in Q2, accounted for $19 million in Q3. Community banking really caught traction and, after accounting for $55 million of our growth in Q2, accounted for $135 million in Q3, and leasing, which was $6 million of our growth in Q2, was $10 million of our growth in Q3. So it was kind of broad based and reflects our view that, with our customer base in most of our markets, the economy is still getting slowly better.

 Now, the rest of your question is do we expect to see further acceleration. I would tell you our pipeline today of deals we are working on looks about the same as the pipeline of opportunities we were looking at when we had our April call and our July call, so we have certainly not seen a deceleration in opportunities. And it is at a pretty risked level. I don't know that the pipeline -- I would not say it is better today than it was when we last talked in July or when we talked in April, but it is pretty much on par with the pipelines we were working on then. So, I don't know if that accelerates or not, but we are at a good place, in any event.

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 Michael Rose,  Raymond James & Associates, Inc. - Analyst   [8]
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 Okay. That's helpful. And then, as a follow-up, this question probably hasn't been asked in a while, but as I look at your capital levels, and obviously, you don't have the period-end numbers. You didn't provide them. But with layering in Intervest, how should we think about capital levels as we move forward? Would you consider raising either common or preferred or some other instrument? What are your thoughts there? Thanks.

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [9]
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 Well, bear in mind, it wasn't but four or five -- three or four quarters ago that I was getting the questions, gosh, you got all this excess capital. Should you buy back stock or do a special dividend or what are you going to do to put this capital to work?

 And you will recall then that we said we believe that through a combination of things, primarily organic growth in our loans and leases, we will be able to utilize all of our surplus capital over time. We still have an abundance of surplus capital, and obviously the Intervest transaction is all for stock. So that is not going to really use up any capital in that transaction.

 So we are still looking at it as a significant surplus of capital, although obviously the growth we have generated, particularly in the last two quarters, is getting that capital ratio down to a more appropriate level. We have still got a ways to go there. But the trend suggests that we will deploy that excess capital in time in what I believe is going to be a very accretive manner, primarily in high-quality loans and leases.

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Operator   [10]
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 Jennifer Demba, SunTrust Robinson.

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 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [11]
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 George, how do you feel about the repercussions of crossing the $10 billion asset threshold at some point, whether it be from a Durbin revenue standpoint or an infrastructure cost standpoint? Do those hurdles deter you or, if not, do you think you would want to go -- some managers think you need to go well past $10 billion for it to make economic sense to do so.

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [12]
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 The $10 billion threshold is a meaningful number, but one does not want to let the tail wag the dog, and really, the $10 billion is a tail and the dog is realizing and achieving our potential as a Company.

 So we have got tremendous momentum and we have no intent or expectation of slowing that down, regarding the $10 billion threshold.

 Now in a perfect world, we would -- you know, at $9.5 billion, find a $3 billion or $5 billion acquisition or a $2 billion acquisition and bop over the $10 billion threshold in a nice, meaningful way. That may happen, that may not happen. But with the balance sheet that we have got at September 30 and the Intervest acquisition expected to close probably -- I don't think we get that closed in Q4, but I think we probably get it closed in the first half of Q1 of next year. On a pro forma basis, we would expect to be $8 billion, plus or minus, and probably plus then, if we have a good quarter of growth in Q4.

 So it is very plausible with the growth numbers that we are achieving that we could breach the $10 billion threshold without additional acquisitions by the end of next year. It could be into 2016. But we seem well on track to do that, and we are not going to slow down or alter a fundamentally sound business strategy because of the short-term repercussions of crossing that $10 billion threshold. That would be silly to take the momentum we have got and mute that or diminish that by saying, wow, we are going to get to $10 billion and we're only going to cross it in a meaningful way.

 We are going to cross it however we cross it, and if we can make a nice acquisition that bumps us nicely over it, that would be really nice, if it is a good deal. If it is not a good deal, we would be stupid to do an acquisition just to jump over $10 billion.

 So we are going to run our company and the impact of crossing the $10 billion as a secondary consideration. We will consider it. We are considering it, but we are going to run the Company for maximum effect and we are thinking longer term, not what, gosh, what is it going to do to earnings for one or two quarters because we crossed $10 billion. I am thinking about where we are going to be in two years, five years, seven years, in 15 years as a Company. And those much longer-term, much more fundamentally important considerations will rule that decision.

 With that said, yes, we will lose some revenue when we cross the $10 billion as a result of the Durbin amendment. We are already -- we have already done -- for three straight years, we have done the capital and liquidity stress tests as if we were a big bank. We continue to augment what we are doing there.

 We know that our consumer compliance requirements will continue to escalate. That has been a very evolving target for the industry for several years now as the regulatory focus has shifted more and more on that. So we have already probably doubled our staff in that regard in compliance and internal audit and so forth in recent years and probably are adding -- we are adding more people this year and next year in that regard. We realize we will have to continue to ramp up what we are doing.

 Our fair lending CRA, those sort of compliance issues are getting more and more attention in our Company because we know the standards get higher as you get bigger. The room for error gets smaller.

 So we are already doing all that and we will continue to do that. I think we will be ready for the increased rigor of crossing that threshold when we do. So we will cross it however we cross it and it will just depend on how acquisition opportunities integrate with our organic growth.

------------------------------
Operator   [13]
------------------------------
 Peyton Green, Sterne, Agee.

------------------------------
 Peyton Green,  Sterne, Agee & Leach, Inc. - Analyst   [14]
------------------------------
 Just a question in terms of thinking about the longer-term perspective in how you manage capital. Certainly, I know you have operated over the last several years with excess capital and now you seem to be deploying it very rapidly through organic growth. And I guess with the regulatory backdrop that exists, not necessarily in relation to Ozarks specifically, but more generally, where do you feel like the right cushion is for total risk-based capital?

 And then, secondarily, if you could remind me about where you are willing to go on a tangible common equity ratio basis.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [15]
------------------------------
 Greg, the regulatory standard for total risk based is 10.5%?

------------------------------
 Greg McKinney,  Bank of the Ozarks, Inc. - CFO, CAO   [16]
------------------------------
 Yes.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [17]
------------------------------
 Yes. The regulatory standard for total risk based is 10.5%. I think our internal guideline is 12%. And of course, there is no regulatory standard for tangible common equity, but I think we have an internal standard of 8.5% in policy now. And we have increased that standard from it used to be 6% to 7.5%, and then it became 7.5%, and then it became 8%, then it became 8.5% because, obviously, the Basel III and other regulatory guideline on capital are pointing to higher capital levels.

 So we have established internal guidelines for all of the metrics and I can tell you the 8.5% tangible common equity ratio, I can tell you the 12% total risk based. I cannot tell you any of the others, but I can tell you they are all 100 to 150 basis points, I think, higher than the regulatory standards to be well capitalized. So we intend to operate with more capital than the industry guidelines, the regulatory guidelines, require.

 And we think that is prudent because of two reasons. We just think it is nice to have some extra capital, and also, we think we are going to see a situation, and I don't know whether it is three years, five years, seven years from now, where there are going to be incredible opportunities because we think a lot of banks are taking on a ton of credit risk and a ton of interest-rate risk and that is going to have some harmful repercussions on some of those banks at some point in time and it is going to create some tremendous opportunities in the future. And we want to have some excess room to be in a strategic position to take advantage of that when those opportunities arise, if they do, as we think, arise.

------------------------------
 Peyton Green,  Sterne, Agee & Leach, Inc. - Analyst   [18]
------------------------------
 Okay. And then as a follow-up, I could very well be thinking about this the wrong way, so please correct if I am. But the end-of-period closed but not yet funded loan commitment number jumped to about $2.6 billion, up from about $1.2 billion at the end of the year. I guess if I took that $1.4 billion change and added that to your total assets, come up with an adjusted tangible equity ratio, since all those are going to fund, it puts you a shade under 9% on kind of an adjusted basis. Am I thinking about that right in that they'll all fund or would you expect to start seeing more payoffs on prior periods maybe mute the loan growth going forward?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [19]
------------------------------
 Well, it is a lot more complicated than yes or no. So, will they all fund? No. Will the vast majority of them fund? Yes, I think the vast majority of them will fund.

 Will they all fund -- will whatever amount of them is going to fund fund tomorrow so that I have got a static balance sheet? No, they won't. They are going to fund and we generated $32 million in revenue income in the quarter just ended. Obviously, we are not going to be content to stay at that level of income generation, so we expect the capital formation to be ongoing as those loans fund. And obviously, we are in the construction and development loan business, so we are going to have lots of payoffs every quarter.

 So if I fund $500 million of those loans in a quarter and have $300 million of payoffs, then I have only got $200 million of growth from that book. Or if I fund $700 million and have $300 million, I have got $400 million of growth. So it is a dynamic -- there are multiple variables going on here and capital formation is one of those variables. The amount of those unfunded loans that we will close is one variable. The amount of paydowns that come out the backside of the portfolio is another variable. And we are modeling, managing, projecting all that constantly and we feel very good about where we are in that whole process.

------------------------------
 Peyton Green,  Sterne, Agee & Leach, Inc. - Analyst   [20]
------------------------------
 Okay. And then, is there -- in terms of the $750 million in commitment growth, linked quarter, is there a right duration to think about in terms of when those loans will fund? Was there anything different about the mix this quarter compared to prior quarters that would make them slower in funding or faster to fund?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [21]
------------------------------
 Probably not, really. I mean, I would have to go look at -- take our prior quarters, projections of funding on all those loans, and sum them up and take the loans we funded in this quarter to answer that. I don't think there is a material difference in the speed, the velocity, of those things funding. I don't think there is a material difference in the velocity of the projects that we are funding, stabilizing, and then refinancing out at much lower rates at much higher leverage.

 We do very low leverage construction portfolios that -- have a very low leverage construction portfolio that yields a good yield, and when the customers stabilize those projects, they go out and get a much lower rate loan at a much higher level of leverage and pay us off. And I don't think anything has fundamentally changed about that dynamic.

 We are on a gigantic hamster wheel of loan origination. You have got to be running all the time because there is a constant wave of payoffs coming from the good work you did a year ago or two years ago or 30 months ago. Those things are going to stabilize and pay off, and you have got to have new business, new customers to keep the growth going when you are facing a constant onslaught of payoffs. Every loan portfolio experiences that, whether it is consumer or residential or whatever. It is just a -- it's a faster velocity of fundings and payoffs in a construction and development portfolio because the life of them tends to be shorter.

------------------------------
Operator   [22]
------------------------------
 Blair Brantley, BB&T Capital.

------------------------------
 Blair Brantley,  BB&T Capital Markets - Analyst   [23]
------------------------------
 Couple questions. Regarding paydowns on the covered loans and purchased loans, anything out of the ordinary there that you are seeing or maybe what your expectations are there?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [24]
------------------------------
 You know that the paydowns, I believe, on the covered loans actually diminished a little bit in the quarter just ended, just very slightly compared to Q2.

 I would expect -- I could be wrong, but I would expect that will be a continuing trend because we are getting down to the point in those portfolios where they are getting a lot better and the component of those portfolios that is residential 1 to 4, as opposed to nonresidential, is -- that percentage of residential 1 to 4 is increasing in those portfolios. So those tend to be longer-duration assets.

 If we are working less problems and we have got higher quality in the portfolio, then there is less loans that we are trying to work out of the portfolio. We are trying to retain the good stuff in there.

 So I think the velocity of paydowns slows, but not tremendously. If you look at our slideshow that is on our investor relations part of our website, there is a slide in the slide deck there that shows the paydowns of that portfolio and you can plug into that slide the current quarter's paydowns -- most recent quarter's paydowns. And that portfolio has been running off over the last 4-1/2 years in a surprisingly linear sort of fashion.

 So I think there is a little bit of a curve here toward the end of that portfolio in the years to come. But I think it still runs at sort of that same linear trend we have been seeing, more or less.

------------------------------
 Blair Brantley,  BB&T Capital Markets - Analyst   [25]
------------------------------
 Okay. Then on the purchased noncovered?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [26]
------------------------------
 The purchased noncovered, those loans will probably -- the trend you saw in the last quarter is probably sort of indicative of what I would expect to see out of that portfolio.

 And those are healthy loans. The customers have lots of options. A lot of those loans, we are -- as they come up for maturity, we are re-documenting and re-closing them as originated loans [other] than purchased loans. So there was probably, I don't know, 20, 30 -- I would think it wouldn't be any more than $40 million of loans in the last quarter that rolled from -- in some form, fashion, got modified, restructured, and moved from the purchased book into our legacy book.

 If there are documentation issues or structural issues, we want to address on those loans. They may be good quality, but they may need a little work on the way they're re-restructured, papered up, put together. We are fixing those and re-papering those as new loans as we go.

 That helps us in a couple of respects. One, if I move them over to the legacy portfolio or if they meet our standards, we are moving them over. We are not moving problem loans over, but if they meet our standards and need to be repapered for some reason or another, we are doing that so we can fix the issues. But it also lets us get them in the purchased loan deal where we can actually create an allowance for loan and lease losses for them and account for them that way.

------------------------------
 Blair Brantley,  BB&T Capital Markets - Analyst   [27]
------------------------------
 Okay. And then, any change in the size of credits or anything in the funded and unfunded balances this quarter?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [28]
------------------------------
 I am sure there is, Blair, but I don't know what it is. I've not done the math on that and done that level of analysis. I don't think there is a material difference, but again, I have not broken that down and looked at the data at that level yet.

------------------------------
Operator   [29]
------------------------------
 Brian Martin, FIG Partners.

------------------------------
 Brian Martin,  FIG Partners, LLC - Analyst   [30]
------------------------------
 Just one question on -- back to that Durbin amendment, the impact you guys would feel when you do cross the $10 billion level. Do you have what that number would be or kind of an estimate of what your implication is?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [31]
------------------------------
 No, I don't. We probably ought to stop and take a look at it, but one of the things that I do is spend a lot of time -- I try to spend all my time focused on things that I can influence or control. And I don't spend any time focused on things that I can't influence.

 But I will ask Greg to take a look at that and do a calculation on that. I have no control over it. I can do all the analysis in the world on that and I can't influence what that number is going to be. So I am focusing my time and attention on things that I can make a difference on.

 But we will try to get that number and have that for you on the next call. By the time we have the January call, we will try to have that for you.

------------------------------
 Brian Martin,  FIG Partners, LLC - Analyst   [32]
------------------------------
 Okay. Perfect. And then maybe just one other thing, on the deposits. I guess I didn't catch how many offices you said were in spin-up mode, and just kind of your outlook on deposit growth relative to loan growth as you look forward.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [33]
------------------------------
 Yes. We have got 25 offices in spin-up mode currently. I don't have an expectation that we are going to increase that number.

 We put the metro Dallas area offices in spin-up mode -- that is about 10 offices or so -- late in the third quarter. So we are in a position now where we are generating deposit growth from our spin-up offices in excess of $20 million a week, and if you add that to the organic growth in the other 134 offices, I guess it is, where we take deposits, the organic growth from those, plus the spin-up, looks quite adequate to meet our needs going forward.

 If you look at our balance sheet at 9/30, you might have noticed that we had some short-term overnight borrowings. Greg, what was it? $70 million, $50 million, $75 million, something like that? Somewhere in that $70 million range, more or less.

 But we have already taken care of all that with deposit growth this quarter. We are back in a net cash position as of today, with some surplus cash. So, we are managing that deposit growth to just fund what we need to do. I am not going to spin up offices and create a lot of cash. I could. I could add another dozen offices and have a lot of surplus cash. But that wouldn't be cost effective.

 It wouldn't be helpful to our EPS numbers for me to do that. I need to spin these up in the right order, just as I need them getting the deposits we need at the lowest possible marginal cost of deposit, and doing so in the context of a three-month, six-month, 12-month, 24-month, 36-, 48-month plan of how you spin offices up and then take them back down so as to maximize your return over an extended period of time. And all that is built into our thinking about what we are trying to do there. So we think we have got plenty of deposit capacity to do what we need to do.

------------------------------
 Brian Martin,  FIG Partners, LLC - Analyst   [34]
------------------------------
 Okay. And then, lastly, maybe just with this most recent transaction on Intervest, is there any further change to the tax rate as you look forward?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [35]
------------------------------
 It is going to probably -- we haven't really done any numbers on that, but just intuitively, they have no tax-exempt assets at Intervest. So we are going to be adding that portfolio at pretty much full marginal tax rate on that, including the fact that part of that operation is in New York. So on a state tax of basis, that tends to be a little expensive.

 So there will be some upward pressure on the overall marginal tax rate with Intervest just because of the New York state tax impact on that part of the operations and the fact that they have no -- bring no tax-exempt assets. So everything -- all their income is going to be taxable.

------------------------------
Operator   [36]
------------------------------
 Stan Westhoff, Walthausen & Co.

------------------------------
 Stan Westhoff,  Walthausen & Co. - Analyst   [37]
------------------------------
 I just have a couple quick questions. In regards to the unfunded loan portfolio, how much is that related to utilized or unutilized, I should say, credit lines? Is that included in that?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [38]
------------------------------
 They are included in that, and unfunded crop loans and unfunded home equity lines of credit are included in that, but they are -- all that is a probably single-digit percentage of that total. Everything in there that is not construction and development loans is probably less than 10% of that total.

 So it is mostly unfunded balances on construction and development loans. On our C&D loans, we, in 99%-plus of the cases, get all the equity and all the mezz debt and all the sub debt funded before we fund, and so we may close a $40 million loan and fund $1,000 on the closing. The customer and the subordinated pieces of the capital structure are funding the land purchase and closing costs and so forth, and they may fund the first month's draw and the second month's draw and the 10th month's draw, all the way out, and month seven or month 11 or month 13, whatever, we start funding our loan and we are the last dollars into the transaction.

 So as a result of that, we tend to have a big unfunded balance. At June 30, and I don't have the September 30 data on this yet, but at June 30, our typical construction and development loan, we were 53% of the capital structure with our loans. So there was 47% equity and subordinated pieces in behind us there. So with 47% of the project to be expensed before you start funding, our funding tends to get usually delayed quite a few months.

 So that portfolio -- that unfunded balance is -- the vast majority of it is those unfunded pieces of construction and development loans.

------------------------------
 Stan Westhoff,  Walthausen & Co. - Analyst   [39]
------------------------------
 Okay. And then, just a little color on The Home Depot security breach. What's that $500,000 or roughly $500,000 going for?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [40]
------------------------------
 It is going for charges that were made on customers' cards that the customer is not going to be obligated for because they're unauthorized and we absorb those.

 That is the standard rule in the card issuance world. It is your credit, and if it is an unauthorized charge, it is on us, not Home Depot, which the laws need to change on that.

 I will tell you that the -- that is the largest loss we have ever had, and The Home Depot security breach was probably the most sophisticated and most pervasive security breach like that we have ever seen and probably has ever occurred. Those guys were very sophisticated in what they did.

 As a result of that, we have totally changed our security protocols, our processes, and our procedures for canceling cards, notifying customers. I was very unhappy with our outcome on this. Our teams were very unhappy with our outcomes and we have totally revamped our processes and procedures as a result.

 To enhance your protection from risk, you have to sacrifice some elements of customer convenience, and we have erred heavily on being convenient to our customers and not putting a customer who is in a foreign country with their debt, depending on their debit card, in a difficult situation, and relied on a set of protocols and procedures and security mechanisms that we had in place. They didn't get us the results we wanted in this Home Depot situation because these were much more sophisticated criminals than we have seen in prior breaches.

 So our processes have changed. I am not going to discuss those in detail, but we don't expect to have the same sort of issues. We have also installed a whole bunch of new processes to make sure that the increased safety security mechanisms we have in place will not adversely affect our customers. So we have really been hard at work on that, in addition to about 1,000 other things this last quarter. But I don't think this will be a recurring sort of problem for us going forward.

------------------------------
Operator   [41]
------------------------------
 David Bishop, Drexel Hamilton.

------------------------------
 David Bishop,  Drexel Hamilton - Analyst   [42]
------------------------------
 A quick question on the community banker, that seemed to rebound nicely this quarter, or increase this quarter. Any change in the strategy or the focus in terms of product focus or product emphasis, re-shifting of lenders there? Just curious what drove that increase.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [43]
------------------------------
 Well, part of this is the fact that the Summit acquisition is on there for a full quarter and that is a strong community banking franchise.

 Part of it is the fact that our Bancshares transaction down in Houston, Austin, and San Antonio has been with us since the first quarter now, and those guys -- and we said this when we announced that transaction. We said it all along the way and when we closed it. Those are some of the -- three of the top 20, two of the top 10 markets in the United States today that they are in. We're getting some good traction there.

 And then, we are just seeing slightly more positive growth from our loss share offices in the southeast and so forth. Those markets are healing up and getting a little better.

 So it was a broad combination of things. I think I have told you and I have said publicly several times, the Summit franchise was a single growth engine sort of deal. They had your traditional community banking model and they were in some pretty growthy markets, but also some less growth-oriented markets. And those guys had developed some pretty good techniques and products and capabilities to get -- to maximize the performance of a rural and suburban community bank franchise.

 I have said clearly their consumer lending platform and products were better than our consumer lending platform and products, so we are going to their platform. We are going to their products, with some very modest tweaks. They have expertise in poultry lending that we didn't have, so we are beginning to roll that expertise out, use their key person in that regard as a subject-matter expert for our entire Company. They had some expertise in timber, lumber, manufacturing, production capabilities. That is expertise we didn't have, so we are using that. And we are rolling that out across our footprint because they just have skills that we didn't have in those three areas -- consumer, poultry, and timber/lumber business type lending.

 So we are getting some additional products. Similarly, the OMNIBANK franchise had some significant expertise -- team of people down there that were really good at 504 and other SBA loans. We did almost no SBA lending before that. We are using their team as subject-matter experts to build a broader SBA loan origination footprint across our platform and across our Company. So that platform is going to be valuable to us.

 So there are things that we are doing on a product-specific basis to get more traction in our community bank lending platform. Again, that was $135 million or so of growth in Q3. Again, some part of that was transferred from purchased loans that came up for maturity that we refinanced, repapered, but that was probably some, I don't know, $20 million to $50 million. I would guess $30 million or $40 million, probably, of that was from that.

 The rest of it is just pure real growth. So, pretty enthused about the traction we are getting on the community banking side of what we are doing.

------------------------------
Operator   [44]
------------------------------
 Brian Zabora, KBW.

------------------------------
 Brian Zabora,  Keefe, Bruyette & Woods, Inc. - Analyst   [45]
------------------------------
 A question on the unfunded commitments. Is the interest rates and floors, is that similar compared to the funded balances that you have, or could we see maybe some decline in the loan yields as you see some of this funding occur?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [46]
------------------------------
 Brian, I don't think we have seen a significant shift in pricing on the stuff we are originating really over the last quarter or two, three quarters. I think they are pretty much -- we have been in a reasonably stable rate environment.

 I know if you trade the 10-year, you would say there was a lot of volatility, but we don't trade the 10-year. From a loan pricing perspective, there has not been much movement in what we have seen.

 We didn't get the extra velocity that we have gotten in Q2 or Q3 by saying, wow, we're going to work for less. That is not how that growth came from, which is probably the thrust of your question. So I don't think it is any different.

 Now, clearly, if you look at the difference between our cost of funds and our legacy loan yields, that number has dropped several basis points a quarter for several quarters. I think that trend of some further contraction between legacy loan yields and cost of funds continues for many quarters to come. Over the next five quarters, I would expect that core spread to continue to decrease because, frankly, the loans we are booking today are not quite as good of yields as the loans we booked two years ago. And it is just a phenomenon.

 I doubt anybody in the industry can say that their loan yields are going the opposite direction because it just doesn't seem to be in the cards yet. So that is where we are on that.

------------------------------
 Brian Zabora,  Keefe, Bruyette & Woods, Inc. - Analyst   [47]
------------------------------
 Great. And then on just variable compensation, how much are your lenders' compensation tied to this loan production, and may again as loans fundings -- fundings pick up, could we see some salary expense increases in the coming quarters?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [48]
------------------------------
 Well, our lenders get paid a base salary and we -- not being suicidal in nature, we ceased to pay lenders for loan production many, many, many years ago. Because if you pay guys for production, even if you put a lot of sight cards on there, you're going to get production you don't want to get. Even the most well-intentioned lender, when his daughter is going to college and the college tuition bill comes in, he is going to think I have got to generate some volume, and I don't want my guys thinking that way.

 So what we do is, we pay base compensation to our lenders. We set that based on their proven historical track record of producing volumes of good-quality, good-yielding loans. We take into account quality and yield, as well as volume, when we set their base compensation. And the guys who do very, very well for us get doses of stock options and, if they are really high-level guys, stock grants. And that is their incentive compensation.

 Of course, those options and grants vest in three years, so that provides them the incentive to think long term, not short term, and think, wow, I want these to be worth more in three years than they are today. Or in the case of options, I want them to be worth something in three years so the stock has got to go up, and if I make a bunch of bad loans, the stock is not going to go up, and I want to be here in three years to cash in on them when they vest. And if I make a bunch of bad loans, I won't be here in three years. So that is the way we do it.

 A lot of other banks have -- and we compete with a lot of these guys every day where they pay their guys direct incentives based on production in cash, immediately. They have a clawback, and in a lot of cases where they get them back if bad things happen in the future, but clawing back a guy's compensation two years from now because he made bad loans is not a full solution to your problem. So we try to do things that just avoid incenting people to engage in behavior that could be harmful to us and try to incent them to engage in the safest possible, highest-quality behavior.

------------------------------
Operator   [49]
------------------------------
 And I am showing no further questions at this time.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [50]
------------------------------
 All right. There being no further questions, that concludes our call. Thank you, guys, for joining in. We will talk with you in about three months. Thank you.

------------------------------
Operator   [51]
------------------------------
 Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.




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