Q3 2015 Bank of The Ozarks Inc Earnings Call

Oct 14, 2015 AM EDT
OZRK.OQ - Bank of the Ozarks
Q3 2015 Bank of The Ozarks Inc Earnings Call
Oct 14, 2015 / 03:00PM GMT 

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

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Conference Call Participants
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   *  Stephen Scouten
      Sandler O'Neill & Partners - Analyst
   *  Michael Rose
      Raymond James & Associates - Analyst
   *  Jennifer Demba
      SunTrust Robinson Humphrey - Analyst
   *  Brian Zabora
      Keefe, Bruyette & Woods, Inc. - Analyst
   *  Matt Olney
      Stephens Inc. - Analyst
   *  Peyton Green
      Piper Jaffray - Analyst
   *  Brian Martin
      FIG Partners, LLC - Analyst

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Presentation
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Operator   [1]
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 Welcome to the Bank of the Ozarks, Inc., third-quarter earnings conference call. My name is Ellen 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'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 to you in understanding our recent operating results and outlook for the future. A transcript of today's call, including our prepared remarks and the Q&A, will be posted on BankOzarks.com under the investor relations tab.

 During today's call and in other disclosures and presentations, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates, and outlook, including statements about economics; real estate market, competitive, credit market, and interest rate conditions; revenue growth; net income and earnings per share; net interest margin; net interest income; non-interest income, including service charge income, mortgage lending income, trust income, bank-owned life insurance income, other income from purchased loans, and gains on sales of foreclosed and other assets; non-interest expense, including acquisition-related systems conversion and contract termination expenses; our efficiency ratio, including our ultimate goal for achieving a sub-30% efficiency ratio; asset quality and our various asset quality ratios; our expectations for net charge-offs and our net charge-off ratios; our allowance for loan and lease losses; loan, lease, and deposit growth, including growth in our non-purchase loan and lease portfolio; growth from unfunded closed loans and growth in earning assets; changes in expected cash flows of our purchased loan portfolio; changes in the value and volume of our securities portfolio; the impact from last year's termination of loss share agreements; conversion of our core banking software and estimated cost savings in connection with that conversion; the opening, relocating, and closing of banking offices; our expectations regarding recent mergers and acquisitions and our goals and expectations for additional mergers and acquisitions in the future; the availability of capital; changes and growth in our staff; the eventual impact of the Durbin amendment on non-interest income; and expenses with regard to regulatory compliance, including the eventual impact on non-interest expense from total assets exceeding $10 billion.

 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.

 Our first presenter today is Chief Financial Officer Greg McKinney, followed by Chief Executive Officer George Gleason. Tyler Vance, our Chief Banking Officer and Chief Operating Officer, is attending a banking conference today and should participate in our next call.

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 Greg McKinney,  Bank of the Ozarks, Inc. - CFO, CAO   [3]
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 Good morning. We're very pleased to report outstanding third-quarter results. Highlights of the quarter included net income of $46.1 million, diluted earnings per common share of $0.52, record growth in both our funded balance of non-purchased loans and leases and our unfunded balance of closed loans, some of our best asset-quality ratios as a public company, an excellent efficiency ratio of 37.6%, and completion of the Bank of the Carolinas acquisition.

 In the third quarter, we achieved an annualized return on average assets of 2.05%, continuing our track record of having achieved returns on average assets in excess of 2% in each quarter this year and in each of the last five years.

 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. Our third-quarter 2015 net interest income was a record $96.4 million. We continued to enjoy a very positive trend in net interest income in the quarter just ended as a result of excellent growth in average earning assets, which more than offset the reduction in our 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 grew a record $680 million. This growth was $213 million more than our previous quarterly growth record achieved in the third quarter of 2014.

 Our unfunded balance of closed loans also increased by a record amount, $859 million, during the quarter just ended and at September 30, 2015, was a record $4.86 billion. While some portion of this unfunded balance will not ultimately be advanced, we expect that the vast majority will be advanced. This has favorable implications for future growth in loans and leases.

 In our previous conference calls this year, we said that one of our goals in 2015 was to achieve growth in non-purchased loans and leases, exceeding our 2014 growth of $1.35 billion. Our non-purchased loans and leases grew $331 million in this year's first quarter, $456 million in the second quarter, and $680 million in the third order, resulting in non-purchased loan and lease growth of $1.47 billion for the first nine months of 2015. We are very pleased to have exceeded our minimum goal for full-year 2015 loan and lease growth by September 30. We expect our loan and lease growth in this year's final quarter to equal or exceed the record loan and lease growth achieved in the quarter just ended.

 We're also very positive about our prospects for another great year of non-purchased loan and lease growth in 2016. Our pipeline of new loan opportunities is as strong as we have ever had and, as we have already discussed, we have our largest-ever unfunded balance of loans already closed.

 Based on these factors, among others, we expect growth in non-purchased loans and leases of at least $2.5 billion in 2016.

 In regard to net interest margin, our third-quarter net interest margin on a fully taxable equivalent basis was 5.07%, a 30 basis-point decline from the second quarter of 2015. For the first nine months of 2015, our net interest margin was 5.28%, a 24 basis-point decline compared to our full-year 2014 net interest margin of 5.52%.

 In our previous conference calls, we have said that we expected another year of declining net interest margin in 2015. Specifically, we have said that, excluding the effects of any acquisitions beyond the Intervest acquisition, we expected a decrease in our net interest margin in 2015 similar to the 28 basis-point decrease in net interest margin we experienced in 2013 compared to 2012. That previous guidance was based on our achieving $1.35 billion in non-purchased loan and lease growth for the full year of 2015.

 We have said numerous times that greater non-purchased loan and lease growth would tend to put additional downward pressure on our net interest margin. While a number of factors contributed to our decline in net interest margin in the quarter just ended, the higher growth in non-purchased loans and leases was one of the most significant and probably the most significant factor. We will gladly accept the loan and lease growth.

 Various other factors have contributed to our decline in net interest margin in 2015. As we have discussed many times in recent years, we have been working with great success to lower our average loan to cost and loan to value on loans, while also striving to get more variable-rate loans and less fixed-rate loans.

 At September 30, our variable-rate loans had increased to 75.86% of total non-purchased loans and leases. These actions have been intended to lower credit risk and interest-rate risk, but they have also lowered our average yield on newly originated loans.

 It seems likely to us that we are in the late stages of this business cycle and it seems likely to us that the Fed will start raising interest rates sometime in the not-too-distant future. If those assumptions are correct, defensively positioning our portfolio to minimize both credit and interest-rate risks could be very timely and prudent. And we think becoming more defensively positioned has been worth giving up some margin.

 Another factor affecting net interest margin is the decrease in volume of loans acquired in earlier acquisitions, including loans previously covered by FDIC loss share. Many of those loans had higher yields reflected in their higher risk profile at the time of acquisition. These higher yielding components of the portfolio are declining in volume at the same time the volume of non-purchased loans and leases is rapidly growing. This change in mix is good for asset quality, but it is contributing to our reduction in net interest margin.

 This year's acquisitions of Intervest and Bank of the Carolinas increased our volume of purchased loans, but did little, if anything, to increase our net interest margin. The loans from this year's two acquisitions have, on average, graded better than loans acquired in previous acquisitions and, as a result, have carried lower yields than the portfolios purchased in those prior acquisitions.

 Another factor which seems to have impacted our net interest margin in the quarter just ended is a lower volume of prepayment and early payoffs of outstanding loans and leases. Many loans have yield maintenance provisions or deferred loan fees, the unamortized balances of which are recognized as interest income when the loan is prepaid. Prepayments vary from quarter to quarter, and while we don't specifically track this data, we believe the positive impact of prepayment on net interest margin in the quarter just ended was less significant than in most other recent quarters.

 We expect to see some additional net interest margin compression in the fourth quarter, but we expect a less significant decline than we experienced from the second quarter to the third quarter of 2015. Our current projection for the decrease in net interest margin from the third quarter to the fourth quarter is between seven and 12 basis points.

 We are anticipating further pressure on our net interest margin in 2016, although to a lesser degree than we have experienced so far in 2015. And if the Federal Reserve raises interest rates next year, we could see net interest margins stabilize and perhaps improve on a quarter-to-quarter basis following several Federal Reserve rate increases.

 As part of our guidance provided earlier this year, we said we expected our cost of interest-bearing deposits would increase between one and five basis points in each quarter of 2015 as a result of our deposit-gathering activities to fund loan and lease growth.

 For the first three quarters of 2015, our cost of interest-bearing deposits has been consistent with that guidance, having increased two basis points in the first quarter, none in the second quarter, and two basis points in the third quarter. We continue to believe that our cost of interest-bearing deposits will increase between one and five basis points in the fourth quarter of 2015 and we think that is a reasonable expectation for each quarter of 2016.

 Let me remind you that our guidance on net interest margin, including the guidance on cost of interest-bearing deposits, excludes the effect of any future acquisitions.

 Another important component of our net interest margin is our profitable deposit mix and careful management of the cost of interest-bearing deposits. In the quarter just ended, we achieved $519 million of deposit growth and our cost of interest-bearing deposits increased two basis points to 31 basis points. These favorable results were achieved by utilizing good low-cost funding sources and continuing to achieve excellent organic growth of core deposit customers.

 As we have previously reported, during 2014 we added approximately 9,370 net new core checking accounts, excluding accounts acquired in acquisitions. In the first nine months of 2015, excluding accounts acquired in acquisitions, we have added approximately 9,912 net new core checking accounts, exceeding the number of net new core checking accounts added in all of 2014. Our various deposit growth efforts and our ability to achieve strong core account growth have favorable implications for future service charge income and liquidity and have us well positioned for future growth in earning assets.

 Now let me turn the call over to George Gleason.

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [4]
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 Thank you, Greg.

 Traditionally, we have been among the most efficient bank holding companies in the US, and the improvement in our efficiency ratio this year compared to 2014 further enhances our excellent standing among the nation's most efficient banks.

 Our efficiency ratio for the quarter just ended was 37.6%. For the first nine months of 2015, our efficiency ratio improved to 39.0% compared to 45.3% for the full year of 2014. While our efficiency ratio will vary from quarter to quarter, especially in quarters where we have significant unusual items of income and non-interest expense, we have stated in recent conference calls that we expect to see a generally improving trend in our efficiency ratio in the coming years.

 This is predicated upon a number of factors, including our expectation that we will ultimately utilize a large amount of the current excess capacity of our extensive branch network; our expectation that our core software conversion and improvement projects over the past two years will further reduce software cost and provide greater functionality for our customers and employees, creating opportunities for enhanced operational efficiency; and our expectation of achieving additional cost savings from our recent acquisition.

 Additionally, while we believe this is an ambitious goal and there are certainly no guarantees that we can obtain it, we are hopeful that we can fully leverage these factors and achieve our ultimate efficiency goal of a sub-30% efficiency ratio over the next several years.

 Our acquisition activity has resulted in our incurring various amounts of acquisition-related system conversion and contract termination expenses, which have increased our efficiency ratio in recent quarters. For example, in the quarter just ended we incurred approximately $2.9 million of acquisition-related and system conversion expenses and approximately $0.2 million of software and contract termination charges. These were primarily related to the Bank of the Carolinas acquisition, which we completed on August 5 and is expected to convert to our core operating system in early November.

 In the fourth quarter of this year, we expect to incur approximately $750,000 of additional acquisition-related system conversion and contract termination expenses. This guidance does not include the impact of new acquisitions, if any, which we might announce in the fourth quarter.

 At September 30, 2015, our total assets were over $9.3 billion. As we previously stated, when we reach $10 billion in total assets, either as a result of additional acquisitions, organic growth, or a combination thereof, we will lose some interchange revenue as a result of the Durbin amendment and we will also incur increased regulatory compliance costs, both of which will create some headwinds in our efforts to further improve our efficiency ratio. If we reach $10 billion or more in total assets at December 31 of this year, we will incur the revenue loss resulting from the Durbin amendment starting as of July 1, 2016. If we don't reach the $10 billion threshold until sometime in 2016, we will not incur the revenue loss resulting from the Durbin amendment until July 1, 2017.

 Based on our current business volumes, we estimate that the revenue loss attributable to the Durbin amendment will be approximately $5.35 million per year. Given our recent growth trends, we may reach the $10 billion threshold by December 31 of this year.

 In recent years, we have been adding staff and taking other actions to prepare for the additional regulatory and compliance burdens associated with exceeding $10 billion in total assets. We are pleased with our progress and preparations to date and we have detailed plans for further staff additions and other preparatory action. All this will add additional non-interest expense in future quarters and years. We expect our annualized additional compliance costs, including costs of staff additions, to increase compared to our annualized costs for such items in the quarter just ended by about $3.7 million in 2016, an additional $1.7 million in 2017, and another $0.6 million in 2018.

 Our guidance regarding an improving efficiency ratio in future years considers the impact of our ultimately exceeding $10 billion in total assets, but does not consider the potential impact of any future acquisitions.

 In the fourth quarter of last year, we entered into agreements with the FDIC terminating our loss share agreements on all seven of the banks we acquired in FDIC-assisted transactions. In our previous calls this year, we've discussed that all future recoveries, gains, charge-offs, losses, and expenses related to the previously covered assets would subsequently be recognized entirely by us, since the FDIC would no longer be sharing in such items. We noted that our future earnings would be positively impacted to the extent we recognized recoveries in excess of the carrying value of such assets and gains on any sales and that future earnings would be negatively impacted to the extent we recognized charge-offs, losses on any sales, and expenses related to such assets.

 We have stated our expectation that the termination of loss share agreements would have a net positive effect on our future earnings. That expectation was based on our historical experience, in which we have recognized combined income and gains on sales well in excess of our combined net charge-offs, losses on sales, and related expenses.

 All this has played out as expected in the first three quarters of this year. In each quarter of 2015, the combined recovery income and gains on sale of other assets has exceeded our combined net charge-offs, losses on sales, and related expenses of purchased loans. These income and expense items may vary significantly from quarter to quarter. And absent the addition of new purchased loan volume, over time we expect the income and expenses associated with purchased loans will decline.

 Let me provide a few comments on our excellent asset quality. At September 30, 2015, excluding purchased loans, nonperforming loans and leases as a percent of total loans and leases were 0.26%. Nonperforming assets as a percent of total assets were 0.41%. And our ratio of loans and leases past due 30 days or more, including past due non-accrual loans and leases to (technical difficulty) leases, was 0.41%. These ratios of nonperforming loans and leases and nonperforming assets were our best since the second quarter of 2006, and this past-due ratio was our best since the third quarter of 2005.

 For the quarter just ended, our annualized net charge-off ratio for non-purchased loans and leases was 0.05% and our annualized net charge-off ratio for purchased loans was 0.14%. Our annualized net charge-off ratio for all loans and leases was 0.08% for the quarter just ended. Our annualized net charge-off rations for non-purchased loans and leases for purchased loans and for all loans and leases were 0.17% for the first nine months of this year.

 When we provided guidance on asset quality in our January conference call, we said we expected our 2015 net charge-off ratio for total loans and leases would not be significantly different from the range of net charge-off ratios we've experienced for total loans and leases in 2013, which was 26 basis points, and in 2014, which was 16 basis points. Our annualized net charge-off ratio for all loans and leases of 0.17% for the first nine months of this year has been at the lower end of that guidance range.

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

 De novo branching continues to play a role in our growth strategy in carefully targeted markets. For example, in the quarter just ended we opened a new loan production office in Greensboro, North Carolina, strategically expanding on our recently acquired offices in the Piedmont Triad region of North Carolina. And we opened our fifth banking office in Houston, Texas, to build upon the momentum we've established in this important metropolitan market. Likewise, in the third quarter we closed an underperforming office from our Intervest acquisition in Clearwater, Florida, leaving us with five offices in that market.

 M&A activity continues to be another focus for us, as we believe M&A provides significant opportunities to augment our healthy organic growth. On August 5, 2015, we closed on our previously announced merger with Bank of the Carolinas Corporation, headquartered in Mocksville, North Carolina. Our eight newly acquired full-service branches between Charlotte and Winston-Salem expand our presence in the northern portion of the Charlotte MSA and provide our initial offices in the Piedmont Triad region.

 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. In fact, we are optimistic about our potential for announcing one or more acquisitions later this year or early in 2016.

 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. Ellen?

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Stephen Scouten with Sandler O'Neill.

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 Stephen Scouten,  Sandler O'Neill & Partners - Analyst   [2]
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 On the organic growth that you had in the quarter, which was obviously impressive, can you give us an idea of the split between what you are seeing in the community bank and what you are seeing in the RESG group? And secondarily on the RESG group, are you guys going to need to add significant headcount or go down different segments within that lending sphere to continue to drive this level of growth?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [3]
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 Great questions. First, let me give you the breakdown.

 Our real estate specialties group accounted for $488 million of our $680 million in non-purchased loan growth in the quarter. So clearly, again, that was the largest driver.

 Community bank lending groups accounted for $156 million of the growth. Leasing accounted for $11 million. Our stabilized properties group accounted for $29 million of the non-purchased loan growth and our corporate loan specialties group actually had a shrinkage of about $4 million. So that's the breakdown.

 And again, real estate specialties group, followed by a strong secondary role from community bank lending were the key drivers in that growth. I will note that obviously for both real estate specialty group and community bank lending, those were near record, if not the best, quarters ever for growth from those two units. So, very pleased with that.

 In regard to our need to add additional staff at real estate specialties group to continue to grow, we are constantly augmenting and adding that team. Over the course of the last year, we have really grown from two teams in each aspect of their business to three complete teams. We continue to augment those teams with additional members. And that will continue. As you know, we traditionally have assigned loans to asset managers at the rate of about 22 loans per asset manager, so they have time to provide the servicing oversight they need to provide to those loans to do the excellent administration work we do on those. We will continue to need to add people as we add volume related to that, as well as people in underwriting and closing and other parts of the operation.

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 Stephen Scouten,  Sandler O'Neill & Partners - Analyst   [4]
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 And can you maybe give a little color on what maybe the average loan size was in the quarter relative to that RESG group growth? And if there's any particular segment that you have any concern on, especially -- we are hearing a lot of trepidation around multifamily lending as a whole. Or does your loan-to-cost really mitigate a lot of those concerns for you guys?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [5]
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 I can't give you an average loan size; I just don't have that data available.

 I can tell you that we are very comfortable with all the assets we are generating there. Obviously, as Greg mentioned in our prepared remarks and as I've mentioned a number of times over the last quarter or so, we think we are getting in the later stages of a real estate credit cycle here. So we are being very defensive in what we are doing. And our primary means of being defensive is to have a lot of equity in our transactions.

 So as we have referenced in our investor presentations in the last quarter, and I don't have this data as of September 30 yet, but as of June 30 our average loan-to-cost in our construction and development loan book with interest reserves, which is the vast majority of that loan book, was 54% loan to cost. And our average loan to appraisal was 45% loan to appraisal.

 Now, we are giving up some yield, obviously, to get that low in the cap stack and be that defensively postured. And we are seeing a few other banks who we've lost a few deals to in the last quarter or so who are really taking within their senior loan structure all or a portion of the mezzanine debt. They are going higher in the cap stack to get more yield. We think that's not a prudent play for us, at least, at this stage of what we think we are in the real estate cycle. We want to be at lower leverage, not higher leverage.

 So that reflects, in part -- that is reflected in part in our reduction in yield on new loans. We're just trying to get more defensively postured, which we think is very prudent.

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 Stephen Scouten,  Sandler O'Neill & Partners - Analyst   [6]
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 Yes. Definitely, definitely. And maybe one last follow-up for me, if I can, is on the -- you guys gave great NIM guidance there, I think, and clarity. But in terms of your ability to keep the NIM flat potentially in 2016 in a higher-rate environment, can you speak at all to what the dead zone might be in terms of do you need 50 basis points to clear the floors in some of these loans that are already at their ceilings and so forth? Or what does that look like as the Fed potentially takes rates higher?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [7]
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 We've got $4.132 billion of variable-rate loans in the non-purchased loan portfolio. That's $4.13 billion. And $3.29 billion of those, roughly 79.5%, just under 80%, of those loans, are at their floor and will not adjust with the first quarter-point move in rates.

 But almost half of that group at their floor will adjust with the next move, from 25 to 50 basis points, assuming the Fed moves in quarters. For example, after a 25 basis-point move, we will have only $1.71 [million] of those variable-rate loans, which is 41% of the variable-rate loans that will not adjust with the second rate move. And by the time rates are up 100 basis points, only $639 million out of that $4.132 billion in loans, and that would just be 15.47% of total loans, would not adjust after 100 basis points in moves.

 So your question is really a good question. The first Fed move of 25 basis points probably does nothing for us. It's probably a push with our cost of funds. The second-quarter, the third-quarter, and the fourth-quarter point moves increasingly should be contributory to our net interest income and net interest margin. And obviously, beyond 100 basis points, if we get to that scenario, those increases would be even more contributory to our net interest margin.

 So as Greg said, we expect some further margin compression in the upcoming Q4. And I think he gave you a range of 7 to 12 basis points on that. And we would expect some further margin compression in 2016 if the Fed does not increase rates. Once we start increasing rates, that first move is probably a push. If we get two or three or four Fed rate moves over the course of 2016, I think there's an inflection point there where our NIM actually gets enough benefit from Fed rate increases that it offsets the otherwise what would be expected to be a declining rate of decline in net interest margin.

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 Stephen Scouten,  Sandler O'Neill & Partners - Analyst   [8]
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 Great. Well, thanks, guys, for taking my questions. And congrats on the strong quarter.

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Operator   [9]
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 Michael Rose with Raymond James.

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 Michael Rose,  Raymond James & Associates - Analyst   [10]
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 George, just want to follow up on the margin question, a couple questions here. In past calls, you've given a sensitivity for each basis point of margin relative to the growth that you expect. Can you provide what that sensitivity is at this point, meaning if you grow an extra $100 million, what is the net impact on the margin?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [11]
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 Michael, there are too many variables at play here for me to try to synchronize that that closely.

 Obviously, we've given the general guidance that if we have more growth, that that's going to have a greater negative down trend on our margin; if we have less growth, that's going to have less of a down trend tendency on our margin, simply because the greater growth, at the rates that loans are being priced at today, dilutes the effective or higher-yielding purchased loan portfolios.

 So you've got a variety of factors going on, as Greg enumerated very carefully. Just the normal change in the mix because the higher-yielding purchased loans of old are running off and becoming less and less as a percentage of our total portfolio, and obviously that impact is accentuated by a much more rapid origination of new loans.

 So the 28 plus-or-minus basis-point of margin compression guidance that we gave in January was predicated upon a growth rate this year of about -- something slightly better than our $1.35 billion in non-purchased loan growth from last year, 2014. And clearly, we've already exceeded with the very robust growth we had in Q3 that full-year guidance as of September 30 and are expecting an equally good or better growth month or growth quarter in Q4 than we had in Q3.

 So that suggests that our 28 basis points of total margin compression for the year is probably going to be on the light side; we are going to exceed that. But we're going to exceed it because of things we've discussed for more than a year, and that is the more growth we have, the more dilution to that high margin we're going to incur.

 And as Greg said in his prepared remarks, we are really glad to have the growth. We like the way we are solving that equation very much. So we're going to keep growing.

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 Michael Rose,  Raymond James & Associates - Analyst   [12]
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 Appreciate the color. It still seems like, obviously, the real estate specialist group is still driving the bulk of the growth. Where are the new production yields in that business, i.e., where are you putting yields on the books for new loans at this point?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [13]
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 Well, where are we putting volume on the books or what is the pricing on new loans?

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 Michael Rose,  Raymond James & Associates - Analyst   [14]
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 Yes. What is the yield that the new loans are going on the books at? Obviously, they are lower, which is dragging the [NIM] down. But I just wanted to get a sense for what that was maybe in the most recent quarter, on average.

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [15]
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 I'll let you reverse engineer that instead of me trying to give you a yield because, again, that is dependent upon the transaction, the type of transaction it is, the markets in which it is, how complex the structure is, how simple the structure is.

 There are so many variables that giving an indicative yield is not a meaningful bit of guidance on my part to give because they are all over the place. It depends on the transaction. So you can easily reverse engineer what the effect was in the quarter just ended.

 One other thing I would comment on the margin -- and Greg alluded to this, I think, in his prepared remarks. And that is that we have a lot of deferred loan fees, and at September 30, to give you a data point, we had $21 million of net deferred credits related to originated loans. So that meant that the fees we had properly deferred in accordance with GAAP accounting on those loans was $21 million more than the cost -- the origination costs that we had deferred on those loans. And that number is up $4 million from June 30, when it was $17 million, and up even from March 31, when that number was just under $14 million. So that deferred fee number has gone from $14 million at the end of Q1 to $17 million to $21 million.

 And that, among other factors, just contributes to the chunkiness of some of these swings in margins. If we have a quarter where we have a lot of prepayments and a portion of those net deferred fees that are unamortized drop into income in that quarter, then that provides a boost to yield. If we have a quarter where we have loans pay off that have prepayment penalties, that provides a boost in yield, or loans that had yield maintenance or minimum interest requirements, that provides a boost in yield.

 We did have a fair amount of that sort of thing in Q1 and Q2 of the year. While we don't track the data and I don't have hard data on this, my sense is we had less of that sort of thing in Q3 of the year that would have boosted yield. So those yield numbers will bounce around from quarter to quarter, depending on those deferred fees dropping into income on early prepayments, prepayment penalty yields, yield maintenance and other factors that can affect that quarterly number.

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 Michael Rose,  Raymond James & Associates - Analyst   [16]
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 Okay, that's helpful. And then just one final one for me, you guys have opened a couple of different real estate specialties groups' offices over the past few years and you have talked about potentially opening up a couple more. How much of the growth in the pipeline is coming from some of these newer offices? Are they increasing their amount of contribution? And have they, over the past couple quarters? And then how should we continue to think about the Intervest business, which I know you'd talked about being a non-contributor for about a year?

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 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [17]
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 The new offices for real estate specialties group that we have opened in the last couple of years in New York and Los Angeles are making meaningful contributions to our growth.

 Now, clearly, our long-established Dallas office, the customer relationships that we have through Dallas that are truly national in scope and include a lot of the major national players. Dallas is still the key. But LA and New York are doing as we expected that they would; they are providing us additional, more regional, local business contacts in those markets, and they are contributing nicely to our growth.

 We had talked in previous calls about opening as many as four or even possibly five more regional real estate specialties group offices either this year or 2016, 2017. Our expectations for deploying those additional offices have not changed. But the timing has changed, and that simply reflects the fact that we've got so much loan volume right now and we are working very diligently to handle that volume in accordance with our very high standards, both from a customer service and a quality control perspective, that it just doesn't make sense for us to open an additional office at the moment. We've got as much volume as we can effectively handle right now. If we opened more offices, we might have more than we actually wanted.

 So our timing for the opening of additional real estate specialties group offices is somewhat in question, not because we don't expect to ultimately open those offices; we certainly do. But like the Fed, we are data dependent. And our loan volume data right now is at a very high level. And I don't need to open another office and create more volume for that team at the moment.

 In regard to our stabilized properties group, as expected, I think they contributed $32 million of new loan originations in Q2, $29 million in Q3. They are having runoff that is slightly exceeding that.

 So, as we expected, this first year is about a push. They are slightly down for the year. We said we thought we would end the year at about $1 billion in the portfolio there. That guidance is still roughly accurate; nothing has really changed from our pre-closing, preacquisition discussions and expectations on that.

 These guys are working hard. I think they are understanding our strike zone a little better each month. And my guess is that we will see some positive growth contributions from that unit some time in 2016. But so far, they have not quite been able to offset their runoff.

------------------------------
 Michael Rose,  Raymond James & Associates - Analyst   [18]
------------------------------
 Great, thanks for taking my questions.

------------------------------
Operator   [19]
------------------------------
 Jennifer Demba with SunTrust.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [20]
------------------------------
 Question, you mentioned you think we are in the later stages of the real estate cycle. At this point, are you exhibiting any caution on any particular geographic market or any particular loan categories in the real estate area? And what are you seeing in the oil patch?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [21]
------------------------------
 Well, we exhibit caution every day, I hope, for the last 37 years on every product type in every market in the country. We are a cautious, conservative lender.

 And we underwrite transactions not based on property type or geography, but based on the fundamental merits and economic feasibility and strength and weaknesses of each individual property and each individual market. So, nothing has changed in the way we approach that.

 Our experience in the oil patch has been very good. That's probably because we are not an oil and gas lender. If we were a lender to exploration and development and oil service companies, I might have a totally different view on that.

 But when you think of oil patch and you think of the geographies in which we operate, obviously Texas is a very big part of our business. And our total nonperforming assets in the state of Texas at September 30 were $474,000, essentially nothing. And that compares to nonperforming assets in Arkansas of $23.5 million, in North Carolina of $5.2 million, in Georgia of $6.5 million, in Florida of $1.5 million. Our exposure in Texas does not seem to be showing any signs of detrimental impact from the changes in oil and gas pricing or layoffs in the oil and gas industry.

 So it really has been to this point, and I think to the greatest extent will continue to be, a nonevent for us.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [22]
------------------------------
 George, does that attitude change on Texas if oil stays at this level for the next one to two years?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [23]
------------------------------
 I'm assuming oil will stay at this level for the next couple of years.

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 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [24]
------------------------------
 Okay, thank you very much.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [25]
------------------------------
 And I'll just point out to you our firm resolve and our opinions and beliefs on that should be very evident from the fact that we opened a fifth office in Houston in the last quarter and are very excited about the prospects of that office.

------------------------------
 Jennifer Demba,  SunTrust Robinson Humphrey - Analyst   [26]
------------------------------
 Thank you.

------------------------------
Operator   [27]
------------------------------
 The next question is from Brian Zabora with KBW.

------------------------------
 Brian Zabora,  Keefe, Bruyette & Woods, Inc. - Analyst   [28]
------------------------------
 Good morning, George. A question on the loan/deposit ratio. It's at 97% in the most recent quarter. Your expectations are for very strong loan growth. Can you talk about expectations regarding maybe restarting those deposit specials and the potential use of maybe using Fed funds or other borrowings to fund the strong loan growth?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [29]
------------------------------
 Well, we have little over $3 billion in approved FHLB advance availability -- Fed funds, borrowings, discount window borrowing capability. I think it's about -- between $3.0 billion and $3.1 billion of availability there.

 We like to keep that availability as really a cushion for fluctuations in the balance sheet and potential extreme economic scenarios. So as a normal rule, we do not want to use that for daily fundings, other than to just even out fluctuations in those daily fundings. So it would certainly be a cheap source of funds to use that, but we like to keep that reserve, that cushion, as a big, big cushion in reserve from a liquidity perspective.

 We have, in the last couple of weeks, begun another series of spin-up campaigns to generate deposits in a pretty good chunk of our offices. I don't have the office count, but I would guess it's 20- or 30-something offices that we have put into spin-up mode, as we did last year. And you will recall, I think we spun up about 25 offices last year, generated something roughly around $0.5 billion in deposits and, over the course of the year, moved our cost of interest-bearing deposits six basis points.

 So we are in a similar campaign now, based on the expectation of continued acceleration in loan growth in Q4. Greg gave guidance we expect Q4 to be at least as much growth as we had in Q3, and the pipeline going into next year looks very good.

 Now with that said, I want to give this one caveat. It's still questionable to us whether we are going to break $10 billion in assets at December 31 or not. So I have told the deposit guys to not hit the accelerator too hard on the deposit gathering and that I don't mind us using some of that cushion of short-term borrowings as of December 31 because I would hate to have them get too many deposits in and push us over the $10 billion mark at December 31 if I didn't need it to fund loan growth.

 So they are being a little bit restrained in their growth plans. So you may see our loan-to-deposit ratio at December 31 temporarily even higher, and you may see us using at December 31 some of those short-term overnight borrowings just as we try to manage our balance sheet and stay under $10 billion at December 31. And we will rebalance all that over the course of the first quarter of next year.

------------------------------
 Brian Zabora,  Keefe, Bruyette & Woods, Inc. - Analyst   [30]
------------------------------
 That definitely makes sense. And then on the expense side, I just wanted to see. Do you think you have realized most or all of the expense saves from the previous [yields] outside of the Bank of the Carolinas transaction that closed this quarter?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [31]
------------------------------
 I think you will see some small part of expense saves from those previous deals, several hundred thousand dollars, running through Q4.

 You will see some of the expense saves from Bank of the Carolinas running through Q1 of next year. Certain elements of acquired staff and acquired operations you have to keep in place through conversions and other things, other processes that have to be completed.

 So there's a fair tail, several quarters, in getting all those expenses normalized. So we will still, probably each quarter of next year, be taking out some expenses related to a number of prior acquisitions, just as an orderly transition of certain functions or certain units is achieved and the cost savings are realized. But apart from the Bank of the Carolinas transaction, we have achieved the largest part of cost saves related to previous acquisitions as of September 30. But there are still remnants that we will be picking up all the way through the fourth quarter of next year on those.

------------------------------
 Brian Zabora,  Keefe, Bruyette & Woods, Inc. - Analyst   [32]
------------------------------
 Thanks for taking my questions.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [33]
------------------------------
 Of course. Glad to take your questions. And I'll add this comment, Brian, that I hope to confuse that cost question a whole lot more by adding a number of other acquisitions that create all kinds of complications in figuring out what the run rate really is. So we're going to try to continue to confuse you guys by making a lot of acquisitions.

------------------------------
 Brian Zabora,  Keefe, Bruyette & Woods, Inc. - Analyst   [34]
------------------------------
 Good luck on that.

------------------------------
Operator   [35]
------------------------------
 Matt Olney with Stephens.

------------------------------
 Matt Olney,  Stephens Inc. - Analyst   [36]
------------------------------
 George, can you talk more about your overall capital position? It seems to me like you've been able to find acquisitions that have been accretive to your capital levels, which is obviously very unusual for the industry. So how realistic is it to assume that you can continue to find acquisitions that are accretive to your capital position?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [37]
------------------------------
 I think, given our strong organic growth profile, we've basically resolved that pretty much any acquisition that we do of size going forward, we need to do it for all stock or almost all stock.

 So the acquisitions that we've been doing have largely provided their own capital as a result of the fact that we have done them for stock.

 All of the transactions, all of the 13 acquisitions that we've done so far over the last six years have been triple accretive. They have been accretive to our book value per common share, our tangible book value per common share, and our earnings per common share literally from the get-go. And that is a strong focus of ours, that we will do transactions that are triple accretive without an earnback period. And obviously if you are doing transactions that are accretive to capital from day one, you are not burning up capital or tangible capital in the process.

 So the conservative posture that we've taken on acquisitions, doing acquisitions for stock, and our strong organic capital formation have served us well. When we did this call about 90 days ago, I said we had just a little over $2 billion of growth room based on our current capital base. And we've still got $2 billion, even though we had a record-breaking quarter in loan growth.

 So we are monitoring it very, very closely, looking at it very carefully, particularly as we ponder the implications of accelerating loan growth, potentially, in future quarters. But we've got a wide capital margin and the acquisitions seem to have largely been neutral to us, maintaining that margin.

------------------------------
 Matt Olney,  Stephens Inc. - Analyst   [38]
------------------------------
 Great, thank you.

------------------------------
Operator   [39]
------------------------------
 Peyton Green with Piper Jaffray.

------------------------------
 Peyton Green,  Piper Jaffray - Analyst   [40]
------------------------------
 Congratulations on another great quarter. Just wanted to maybe ask a different way. Certainly, the wind is at your back. And wanted to maybe ask you, where are you seeing, if any, any troubling signs out in the footprint or maybe by products?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [41]
------------------------------
 Peyton, obviously we are not seeing a lot of troubling signs. Our non-purchased loan charge-off ratio in the quarter just ended was five basis points. If you throw in purchased loans, the charge-off ratio on the total loan portfolio was eight basis points annualized. And I think we gave stats that our nonperforming loan ratio to non-purchased loans or nonperforming assets on non-purchased loans were our best since way back in 2006. Our past-due ratio was the best past-due ratio since 2005.

 We are in a very good spot, asset quality-wise, and we want to continue to maintain a very good status asset quality-wise, which is why we are being so conservative in our underwriting documentation, structuring of transactions, and trying to get more equity by far than we've ever historically in prior decades, at least, of the Company gotten. We have been in the same zone for a number of quarters now as far as our aspirations to get a lot of equity in transactions.

 There are markets around the country where one takes note of specific factors. For example, to go back to Jennifer Demba's question, Houston is having positive employment growth. But given the layoffs in the oil and gas industry, it's tiny positive growth compared to the historical norms. So one certainly takes those factors into account in underwriting projects in Houston.

 But with that said, we've got a couple of new projects that we closed or are in the process of closing in Houston that we just feel fantastically good about.

 If you are in Miami and you look at the change in the buying power and the interest of foreign buyers in buying condos in Miami because of the strength of the dollar and the decline in the South American currencies, particularly the Brazilian real, and you look at how that changes the pricing dynamics for what was a foreign-driven buyer market, to a large extent, there, one has to take all that into account.

 If you look at New York and you look at the run-up in land values and condo prices and other things that occurred really from 2009 to 2014 -- all that seems to have abated a bit over the last few quarters, one has to take into account those significant changes in prices and ask if that's sustainable and real.

 So pretty much wherever you go in the country, and there are some places that I could name where you've had a lot of apartments constructed and one has to ask if the demand and the employment growth and the population growth are there to absorb that supply, you just have to take all those factors into consideration in whether or not you approve a loan, is it a sound loan, is it a sound and viable project, are you defensively enough structured in the loan. So it's what we do every day, and we would actually rather see a downturn in the economy. That would work to our benefit substantially, we believe. But I think we are still some quarters away from that.

------------------------------
 Peyton Green,  Piper Jaffray - Analyst   [42]
------------------------------
 Okay. And then, the community bank continues to nicely ramp. Do you think that your outlook is that it will continue to ramp through the fourth quarter and through 2016?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [43]
------------------------------
 Yes, I think so. And I want to be cautious about that outlook, but I do have a cautiously positive outlook. And as we've talked about in previous calls, our staff there seems to really be gelling nicely and we are getting some good traction.

 We've got in our community banking unit some very good growth markets -- Austin, Houston, less now than before but still we are getting some decent opportunities in Houston. Our Charlotte market, very good. The Piedmont Triad offices we acquired in the Winston-Salem area, all that, our good lending team, good markets, all that is very positive for our growth.

 And then, I've mentioned a number of times these acquired loss share offices just struggled so much for so many years to gain traction. And really over the last year or so, we are seeing some decent positive traction in a number of those markets, not all of them yet, but a number of them. And that seems to be gaining a little ground.

 So based on all of that -- the team, a number of really good markets, the slight growing traction in a lot of our loss share markets that were hit so hard in the downturn before we made the acquisitions -- we are cautiously optimistic that that community banking number is going to grow quarter to quarter.

------------------------------
 Peyton Green,  Piper Jaffray - Analyst   [44]
------------------------------
 Great. Thank you very much for taking the questions.

------------------------------
Operator   [45]
------------------------------
 Brian Martin with FIG Partners.

------------------------------
 Brian Martin,  FIG Partners, LLC - Analyst   [46]
------------------------------
 George, just two things. Peyton covered one of them, on the pressure points on credit. And it doesn't sound like you are seeing anything at all. But maybe just if you can talk about how you see the credit cycle playing out from here. Some insight there would be helpful.

 And then, you talked a little bit about sounding a little bit more optimistic on M&A. Just wondering if there's anything kind of -- those are new markets, existing markets. And any change in opportunities of size? Are they still more smaller deals or larger deals?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [47]
------------------------------
 That's a lot of questions all wrapped into a small package there. Let me talk about the M&A area, which I think we haven't covered as much.

 We have continued to be very, very active in M&A. I know some of you have commented that it doesn't seem like we've announced a lot of deals this year. We've had a couple of deals that we worked on and got really late in that due diligence and other findings very late in those processes caused those deals to not be transactions that could be safely done. So we've spent a lot of time working on a couple of transactions this year that just didn't make, for reasons that are really beyond our control. And I would say we did our due diligence, and as a result of our due diligence, they were very successful outcomes in that we didn't do them.

 We at all times have a number of transactions that we are working on. And we are working on a couple of transactions now that we would very much like to get to the table. That's not an unusual statement to make; I could pretty much have said that at any time in the last three years, that we are working on a couple of transactions we would like to get to the table. But we're working very hard in that regard. And as I said in my prepared remarks, we are optimistic that we will have something positive to announce later this year or in the first quarter of 2016.

 M&A is a focus. We've got a lot of resources devoted to it. We think there are a lot of good opportunities out there if we can get them to the end zone.

 As for the size of transactions, obviously our balance sheet is getting bigger. The Bank of the Carolinas transaction was about a $350 million total asset transaction, in round numbers. I'm probably understating it a skosh, but close there. And that transaction certainly would be on the small size of what we would contemplate.

 But that was a wonderful acquisition for us. We got a great team of bankers, and Ed Jordan, who is leading that Piedmont Triad area for us, an excellent banker. We got some great offices and some great markets. They had really done a super job under the leadership of the PE guys that had recapped the bank, cleaning up their asset quality problems, putting that bank in a perfect position to just step forward in a very positive manner from the get-go.

 So we would do smaller transactions if we found deals like that that were just compelling, as that transaction was. And I hope we will find more of those deals. But our tendency at this stage is to be looking at larger transactions, mostly from $700 million or $800 million on the small side to $4 billion or $5 billion on the larger side.

------------------------------
 Brian Martin,  FIG Partners, LLC - Analyst   [48]
------------------------------
 Okay, perfect. And maybe just the part about the credit cycle, how that plays out from here? Any thoughts on that? Any more color you can give?

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [49]
------------------------------
 I thought if I ignored that question, you might not ask it again.

 That's really beyond by pay grade. I mean, we are -- I'm saying we are late in the cycle and that's predicated upon various and sundry things. And one you've seen, you've seen valuations of properties go up a lot. And a lot of markets around the country look toppy to us, which is causing our response to just dig in as low in the cap stack is we can get on things we are doing.

 You see transactions being pitched that you look at and you think, boy, in a more normal time, I don't think the sponsor on this transaction probably would have looked at this deal. It's got issues and variables and questions and things about it that -- it looks like some sponsors are reaching to find deals and get deals done that make sense. Just the duration of the current economic expansion causes one to do the math and say we are longer than average here in a period of expansion.

 And you've got to think we are getting to the end. In fact, the Fed is talking about raising rates, and usually when the Fed raises rates, they eventually overdo it on the upside and cause a downturn. You look at the global situation and the slowing growth rates in China, the severe disarray that a lot of the resource-rich exporting developing countries are in, the fairly problematic situations that still exist in Europe, even though the most recent short-term data there looks a little better, and you just think, man, we've got to be getting toward the end of the cycle.

 So, I don't know. I could be missing that. If I am, our shareholders can chastise me for being too conservative and foregoing opportunities that we wouldn't be foregoing if we thought we were early in the cycle instead of late in the cycle. But we do think we're late. There are a lot of things that sort of make us feel that way. And we are trying to behave like we are late in the cycle.

------------------------------
 Brian Martin,  FIG Partners, LLC - Analyst   [50]
------------------------------
 Got you. I appreciate the call, George. Thanks and nice quarter.

------------------------------
Operator   [51]
------------------------------
 And we have no further questions.

------------------------------
 George Gleason,  Bank of the Ozarks, Inc. - Chairman, CEO   [52]
------------------------------
 Thank you, guys, for joining our call today. We appreciate it. There being no further questions, that concludes our call. We look forward to talking with you about 90 days. Have a great day. Bye-bye.

------------------------------
Operator   [53]
------------------------------
 Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.




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