Bank of the Ozarks at Barclays Global Financial Service Conference

Sep 11, 2017 AM EDT
OZRK.OQ - Bank of the Ozarks
Bank of the Ozarks at Barclays Global Financial Service Conference
Sep 11, 2017 / 06:45PM GMT 

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Corporate Participants
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   *  George G. Gleason
      Bank of the Ozarks - Chairman, CEO & President

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Conference Call Participants
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   *  Matthew John Keating
      Barclays PLC, Research Division - Director and Senior Analyst

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Presentation
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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [1]
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 Well, good afternoon. My name is Matthew Keating. I cover the U.S. mid-cap banks for Barclays.

 We're very pleased to welcome Bank of the Ozarks for its inaugural presentation at our Global Financial Services Conference. Headquartered in Little Rock, Arkansas, Bank of the Ozarks had just 5 branches and around $200 million in assets back in 1995 when it initiated its current growth strategy. The bank presently has more than 240 branches and over $20 billion in assets. It's consistently one of the most profitable and efficient banks in the United States with an exemplary asset quality track record.

 With us today for our fireside chat is Chairman and CEO, George Gleason. Also in attendance for the company is Chief Administrative Officer and Executive Director of Investor Relations, Tim Hicks.

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Questions and Answers
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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [1]
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 So with that, why don't we get started? So George, there seems to be some concern of late around the bank's growth prospects. However, it sounds like the Real Estate Specialties Group enjoyed a very strong August in terms of loan origination activity. In your opinion, is the lower end of the bank's $3 billion to $4 billion non-purchase loan growth goal still within reach this year?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [2]
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 Well, we hope so, and we'll update that guidance, obviously, after we get through the end the quarter in our October call. But we're continuing to enjoy excellent application volume, excellent closing origination volume. As it has been for the last 2 years, the challenge for us is just the extreme velocity of payoffs. But the quality of our loans, the quality of those projects, how marketable they are if -- whether they're being sold by lot or by condo or sold as an income-producing property, is evidenced by the fact that they are paying off quickly. But to your point, we had a great August. August is normally a slow month for us. We had over $1.1 million (sic) [billion] in loans from our Real Estate Specialties Group approved end loan committee in August. To put that in perspective, I think our total RESG originations last year were somewhere around $8.2 billion to $8.3 billion in closings. And this year, we're expecting that number to be higher, probably somewhere close to $9 billion and perhaps even as high as approaching $10 billion in originations this year. So having $1.1 billion of approved loans in committee in a single month is better than average month, and frankly, one of our best, so we're encouraged by that. We continue to battle the velocity of prepayments, though.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [3]
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 That's interesting. So yes, the Real Estate Specialty Group currently accounts for a little less than maybe 68% of the company's overall non-purchased loans. The bank has talked about a desire to be a bit more, I guess, broad based from a loan mix perspective. Like how big of a change are you contemplating then as you try to grow the non-RESG balances a little bit faster over time?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [4]
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 Well, we've been working on this for some period of time. And I want to be clear that our goal is to not in any way slow our commercial mortgage loan origination business, commercial real estate business, the Real Estate Specialties Group. We have -- in June of this year, I communicated to our Board of Directors, key members of the board and key members of senior management that I was going to start spending a much larger percentage of my time with Real Estate Specialties Group and was going to hand off a number of my direct reports. And those of you who listened to our July conference call will recall Tim Hicks' promotion to Chief Administrative Officer being announced. Tim took 3 of my direct reports: Tyler Vance, our Chief Banking Officer, Chief Operating Officer, who is also with us today, took one. Darrel Russell took one. And John Carter, who heads our Community Banking Group, took one. So I handed off 6 direct reports in June and July with the expectation that I was going to spend about 75% of my time focused on Real Estate Specialties Group in 2018 and 2019 and would ramp up my involvement this year. So with Dan's resignation in late July, fortunately and coincidentally and totally coincidentally, I'd already created the personal bandwidth to spend a lot more time with Real Estate Specialties Group. So we expect -- and the reason I was allocating that time to RESG is we expect that business to double over the next 3.5 to 4 years. We expect to redouble that business again over the 7- to 8- to 9-year period of time. So we are clearly focused on growing our commercial real estate business and continuing to do that. At the same time, we've said for many quarters now that we believe that our company is a more valuable company if we diversify into other lines of business, not away from commercial real estate, but in addition to commercial real estate. So we've been focused over the last, really, several years in building our SBA-lending capabilities, our poultry-lending capabilities, our consumer small business lending capabilities, our indirect, marine and RV business capabilities. We're working on expanding the product line and our leasing and equipment finance business, so all those are important elements for us. And we believe that the optimal mix from a capital allocation point of view, which we think we'll get there probably sometime on a deal flow basis in the fourth quarter of 2018, would be to have about 57% of our business be commercial real estate and about 43% be from the other categories of earning assets on our balance sheet. So we're well on track. And we, in fact, last quarter had a rare quarter in which our non-RESG components contributed slightly more than half of our growth last quarter. So that reflects the fact that these other elements are gaining momentum, and we think that's a real positive. But I do want to emphasize, we're not in any way reducing our focus on commercial real estate. We're just increasing the focus on these other lines of business in addition to our CRE business.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [5]
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 So George, maybe as you've directed more of your personal attention towards the Real Estate Specialties Group, maybe if you could comment on some higher-level trends within the commercial real estate and the construction market more specifically. You do hear concerns from time to time about those markets becoming overheated. But what's your perspective as you've taken a fresh look again at these markets?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [6]
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 Yes. Well, it's not so much a fresh look for me because in 14 years we've had Real Estate Specialties Group, I have approved every single loan originated in 14 years. So I'm looking at things sometimes a few days or a week or 2 earlier than I might have looked at before, but I've been intimately involved in the details of RESG from its inception 14 years ago. But I think, by and large, markets are relatively healthy. My perspective is this. We had several years in the Great Recession where not a lot of new commercial real estate product was developed. And developers literally, because in the downturn, they went into the downturn with too much supply, and developers worked that supply off and then they were very reticent about coming to market with new supply because the economy was not recovering at a blistering pace but at a very modest pace. So developers fell behind developing product in most markets and most product types. So you had a period from, say, 2011 to 2015 wherein when developers brought product to market, it rented for more than they'd projected. It would rent for or it sold for more than they've projected it would sell for because supply had not caught up with demand. And when you have inadequate supply and excessive demand, prices rise. And we do supply-demand models on every market, submarket, micro market in which we drop a product and get very specific on the niche of that product in that market, submarket, micro market. So as we look to 2016, we saw markets in which supply was catching up with demand. The pent-up demand had basically been burned through, and the new supply coming needed to be balanced with the new demand created by population growth, job growth, demographic shifts and so forth. So market conditions have played out very much as we expected in 2016 and 2017. In a lot of markets, you're seeing less apartments or you're seeing fewer office buildings built. But the moderation in supply has pretty much been in tandem with the demand that exists in that market. So as we're looking around the country, we've got active real estate loans in 41 states today. As we're looking at those supply-demand models, there's a pretty healthy equilibrium in most markets in most product types. Now you may have -- I mean, for example, I could point you to a couple of markets where you're having apartment developers who are bringing product to market this year, giving 1 or 2 or 3 months of free rent on a 12-month lease, to lease up because supply temporarily got ahead of demand. But in those markets, in almost every case, we're seeing that there was a cessation of new product brought to market for a period of time over the last 4 quarters or 6 quarters, and that supply-demand equilibrium is going to get restored very quickly in the next year or so. So while you have a little bit of out-of-balance condition in a few markets, it's not anything severe. Now obviously, if you're talking office building in Houston, you got a clear oversupply there. If you're talking $20 million and up condos in New York, there are more of those than are justified by the current demand for those. But barring a few product types in a few markets, I think it's pretty well in balance. The people we do business with are very smart, very well-heeled developers, and they're doing econometric analysis of the markets, very similar to the analysis that we're doing. And they're not going to build product if there's not a demand for it in their view, in their -- you don't get multi-billion dollar balance sheets as a developer without making pretty good decisions most of the time.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [7]
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 That's very helpful context. And within that supply-demand framework, one of the things we've observed from talking to a lot of banks is that a lot of banks have pulled back, obviously materially, from construction and development lending. And so does that actually -- is that still creating additional opportunities for your bank to continue to fill that void to some extent?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [8]
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 Absolutely. And again, to put that in historical context, in 2009, 2010, 2011, there was not a single day in the entire lead-up to and aftermath of the Great Recession where we were not doing loans of every product type every day. So if you sent us a land loan or a commercial lot development loan or a residential lot development loan or an office building or a warehouse or an industrial or multifamily or retail or hotel or condo, we were looking at all of those product types every day during the Great Recession. And we're a commercial real estate lender. We understand the business. We have expertise in the business. And that consistency of availability and execution for our customers has been a critical component of our business. I was on a call this morning with one of the large brokerage firms in the U.S., and they were doing their monthly national sales call. And they asked me to speak to their team literally across the country this morning and talk about our bank and our business. And that was one of the points I made. Every day, every product, all the time. We were constantly in the market, and we're constantly in market today. And we will be constantly in the market in the next recession because when you deal with really high-quality product and you deal with really high-quality sponsors and you're at the low leverage we are, you're not going to have a lot of problems. Our average loan to cost in our Real Estate Specialties Group is 49%. Our average loan to appraised value is 42%. And we are, in almost every case, the sole senior secured lender in the transaction. So we're the only person with a mortgage on the asset and we're 42% loan to value. So when you have that level of conservatism and you're dealing with that quality of product and that quality of sponsor, you just don't have a lot of problems. And that lets us stay active all the time every day every product type in every market in the country.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [9]
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 Maybe transitioning from commercial real estate construction more to another prevalent theme at this year's conference has been deposit pricing pressures. And sort of glad to see Tyler Vance in the audience here. Obviously, the bank has been pretty unique in its deposit spin-up strategy among its branch network. But I'm curious given the strong loan growth that this bank has the potential ability to consistently generate, are you having -- facing more pressure on the deposits side, knowing that you're going to need those deposits to fund that growth? And how are you thinking about -- within your footprint as sort of future deposit pricing pressures? Is it getting more intense as we move into the year? Or are things starting to stabilize?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [10]
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 Good question, yes. We're in 156 different towns and cities in the U.S., excluding New York. We throw it out because the numbers tend to skew all the numbers when you include New York. So excluding New York, 156 towns and cities. We have a little over 4% of the branches on average the retail deposit infrastructure in those 156 markets, but we have only about 1.5% of the deposits in those markets. And you can look at that and say, "Oh my gosh, these guys must be terrible bankers. They're so underperforming the market." But the reality is we've made 15 acquisitions since 2010, 7 FDIC-assisted and 8 traditional M&A transactions. And in those acquisitions, we acquired tremendous deposit infrastructure way beyond what we needed to fund growth in our balance sheet at that time. So the way we address that is we said, "We don't want to close this infrastructure and lose this capability, the connections with the customers, the staff, the branches," so we just priced our deposits to the bottom of the market in those markets and ran off all the rate-sensitive customers and focused our staff. Tyler did a great job in this, in training and focusing our staff on growing core checking, savings and money market account, no-interest or low-interest customers. As we need more deposits, we're using a market segmentation strategy to analyze where we can grow deposit the most at the lowest effective cost of funds. And Tyler has 47 of our 241 or 242 deposit-gathering offices in spin-up mode today. And spin-up means we've become aggressive in pricing and advertising in that market. So if -- and Tim Hicks, who is with me today, is really the guy who provides Tyler the target. He does an analysis every month that we project forward for 36 months that shows how many dollars we're going to need to fund our loan growth every month. In some months, that's $400 million or $500 million. Some months, that's $200 million. Some months, that's a negative $80 million because we have net payoffs in particular months. So we project that. And every month, Tyler, and more frequently, sometimes Tyler gets that road map, and he adjusts his spin-up strategy. So if we have a quarter where we're going to have fairly modest loan growth of maybe $500 million in non-purchase loans that quarter, we're probably going to end up with a 94% or so loan-to-deposit ratio. And if we have a month where we're going to have very robust growth in non-purchase loans, maybe $1.5 billion, we're going to end up with the same 94% loan-to-deposit ratio because Tim is going to provide Tyler the projections of that well in advance. Tyler is going to be adjusting strategy, and he'll simply balance the equation with the number of offices in spin-up mode and the strategies and marketing employed in those offices. So with 4% of the deposit infrastructure and roughly 1.5% of the deposits share today, we think we got $20 billion, $25 billion of deposit growth capacity in our existing branch network. Now to your point on margin, yes, it cost us higher interest rates to attract those deposits. But if you look over the last 4 quarters, the difference -- and we've got a slide in our slide deck that shows this, the difference between our cost of interest-bearing deposits and our yield on our non-purchased loans, and non-purchased loans are all the loans we originate. Purchased loans are the loans we acquired in our 15 acquisitions. So the core spread, as we call it, which is that difference between our yield on the loans we originate and the cost of interest-bearing deposits, has widened 20 basis points. And that's very positive. And if you look at our deposit betas, you would say, "Oh wow, look, their deposit betas are probably higher than other banks." I don't know what it may have gone up, 15 or 20 basis points in that period of time. But our yield on the loans that we're originating and have on the books from prior originations are going up faster than that. So that's the focus for us. I don't mind paying 6 basis points more for deposits next month because I need $500 million of deposits than I paid 3 months ago. If my yield on loans is going up 12 basis points, then I'm still 6 basis points better off.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [11]
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 Understood. Yes.

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [12]
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 So we're pretty optimistic and pleased with the way that's working out, and we feel like we've got tremendous capacity in the existing branch infrastructure. We will need more deposit branch infrastructure in 2021, 2022, 2023. That end of design and development phase is now, so we'll build the infrastructure we need several years, a couple of years in advance if/when we actually need it.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [13]
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 I guess despite that deposit bandwidth or capacity that the organization presently maintains, it still has one the lowest efficiency ratios that most U.S. banking at 35% last quarter. So how is that achieved? And is that possible -- is it -- a sub-30% efficiency ratio is still possible for the organization over time in your view?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [14]
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 Yes. I don't think we're going to make much improvement on the efficiency ratio this year. And the reason for that, and we talked about this several times recently in our last several conference calls, we've talked about the fact that we're really building out the infrastructure that we need to be a $40 billion to $50 billion bank. So we're building out the enterprise risk management, the compliance, the internal audit, the loan review, the cyber security, the IS/IT, the business resilience, business continuity, all of those elements. We're spending millions of dollars on people and processes. And I'd tell you what, we have 44 offices in Florida and 67, Tyler, 69 in Georgia. I can't remember the exact number, and we have operations in Houston. And the additional resources that we have spent on business resilience and business continuity over the last year have paid off in spades for us as we've been dealing with Hurricane Harvey and now Hurricane Irma. The planning, the preparation, the resiliency and the recovery that we've seen in Houston, how quickly we've been back to business as usual there, we couldn't have done that without the infrastructure we built. So we're spending a lot of money on that infrastructure, and we'll have that full complement of people and processes and procedures in place over the next year or so. And once we do that and that build and the DFAST build -- we'll do our first DFAST submission next year based on this year-end number. Once we have that build complete and we're getting close on that, then I think we can really start systematically improving that efficiency ratio. And as we pull more deposits through our existing branch networks and sop up some of that excess capacity that we've got there now and capitalize on the technology enhancements that we're bringing about from our Ozark Labs down in St. Petersburg, Florida, I think we really can get to a sub-30% efficiency ratio. It's a very reasonable goal. It's not going to be easy, but it's a very plausible goal for us to want to achieve.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [15]
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 Great. And since we have a large crowd here, why don't we move to the audience response system component of this chat here? If you could please bring up the audience response questions. Okay. So the first question for the audience as we bring those up hopefully pretty soon would be "do you own shares of Bank of the Ozarks?" So first question (sic) [answer] would be yes, we're overweight. Second answer would be yes, we're market weight. Third answer is yes, but we're underweight or on a net short position; or four, we're not involved in Bank of the Ozarks at all. And we'll take 10 seconds to vote.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [16]
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 And Tim and Tyler, you can't vote.

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [17]
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 They better be overweight.

 (Voting)

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [18]
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 And the results are in. It shows that about 53% of the audience is not involved, either direction, in the Bank of the Ozarks right now. 37% of the audience are overweight the stock, followed by 11% who's market weight. So if we can move to the next question, please.

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [19]
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 I would comment on that, the 0 percentage short interest represented, I think reflects the fact that the shorts really don't want to hear the truth and know the story. It runs contrary to their thesis.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [20]
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 Right, right. Now that's interesting. No. Improvement in which factor would have the greatest influence on you potentially increasing your exposure to Bank of the Ozarks? One, net interest income; two, fee income; three, expenses or efficiency ratio; four, credit quality; five, profitability; or six, higher capital return. And we'll take 10 seconds to vote.

 (Voting)

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [21]
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 And the results to this question show that about 50% of the audience would like choice 4, asset quality. So I guess more comfort around credit quality and then followed by 31% of the audience that would like to see profitability improve. And so I guess it's interesting to me that 50% of the audience would like to see an improvement in credit quality, as asset quality has been sort of one of the most important parts of the story here over time. It's been very much below peers. And so it seems to me this is almost concerns that when a cycle turns, credit quality may not prove as strong as it is today. So any comfort you can give investors around why that's unlikely to be the case?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [22]
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 Well, that's a surprising statistic to me and a surprising outcome. Our net charge-offs ratio this year has averaged, Tim, 4 basis points, which is you've got to be pretty hard to get under, guys. I mean, 4 basis points. That's about -- little bit -- almost 0. And in our 20 years as a public company, we've not had a single year where our net charge-off ratio has equaled or exceeded the industry average, not one year. In fact, we have averaged a net charge-off ratio over 20 years that has been 65% less than the industry's net charge-off ratio over that 20-year period of time. So our losses have been 35% of the industry's losses is the other way to look at that. Matt mentioned that Real Estate Specialties Group accounts for 68% of our non-purchased loans. And to put that in perspective, going into the Great Recession, RESG portfolio was about probably our average loan to cost was probably about 72%, plus or minus a couple of points. And our average loan to appraised value was about 68%, plus or minus. So we were much higher leverage, really about 25 points higher leverage in that portfolio going into the Great Recession than we are today. And in the 14-year history of RESG, we've had 2 losses, 2 credits result in losses that were about $10.5 million, I think a little less than $10.5 million in total losses in 14 years, which equates to about a 6 basis point average annualized net charge-off ratio for RESG. And it is a much bigger percentage of the portfolio today than it was then. So it's hard for me to understand what else we have to do to make a compelling case that our asset quality is pristine. Our past-due ratios, I think, for the last 4 or 5 quarters have been the lowest quarterly past-due ratios in the 20-year history of our company as public company. Our nonperforming asset ratios, our nonperforming loan ratios are near record lows in the history of the company. Again, I'd point to that 4 basis point charge-off ratio. And even if it quadruples, you're still at a 16 basis point net charge-off ratio that would be the exceptional compared to the industry. So we feel extremely good about our asset quality. Another data point that I would give you is when we did the first dry run of our DFAST stress test. One of the -- and we did asset-level, loan-level stress testing on all of the RESG loans. So every one of those loans had their own econometric model built for it because of the unique nature of a lot of those credits. And what was interesting to us is that as we projected 9 quarters into the future, we needed more capital in our base case scenario than we did in the adverse and severely adverse scenarios. And the reason for that is in the base case scenario, we're projecting substantial growth rates. We're retaining capital, Tim, what? about a 13% capital retained earnings after dividend, so we're retaining capital at a great rate. So if you're projecting forward and you're growing 13% and you're retaining capital at 13%, you don't need to raise capital. We needed to raise capital because our forward growth rates were significantly higher than that projected capital retention rate. But in the adverse and severely adverse scenarios, yes, our losses increased, but they increased very modestly, even in the severely adverse scenario. And as a result, the slowing of our growth rate freed up more capital than it took to cover the small incremental additional losses in those more adverse and severely adverse scenarios. So we feel really good about our asset quality.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [23]
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 Great. And just a final [audience response] question, if you could bring that up, please. Yes, please. So the question number 4 is over the next 2 years, do you believe Ozarks' more likely to acquire a smaller bank? Two, enter into a mergers of equals transaction? Three, sell to a larger institution; or four, refrain from M&A entirely. And we'll take a few seconds to vote.

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [24]
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 It's sort of like being on Jeopardy.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [25]
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 It is. We should have the music. That's the one thing we're missing. Exactly.

 (Voting)

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [26]
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 So the results are in from the audience, and it shows that 80% believe that the bank's likely to acquire a smaller institution over the next 2 years. Only 10% thinks the bank might refrain from M&A. So maybe with that as a backdrop, can you provide an update on Ozarks' M&A interest in the moment? And maybe apart from being triple accretive, what does Ozarks look for in a potential acquisition target?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [27]
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 Well, the triple accretive hallmark is one that we've established with the 15 transactions that we've done since 2010. All of them have been accretive, day 1 to book value per share. They've been accretive day 1 to tangible book value per share, and they've been accretive in the first full year of operations or first 12 months of operations after acquisition on an EPS basis, so those are standards that we're committed to. I don't really ever want to have to stand up before investors and explain why we did a dilutive transaction or how many years it's going to take to recover the dilution. So those are very important to us. And then obviously, the transaction has got to add some value to the fabric, the tapestry of our franchise going forward. It can't just be a financial deal that makes money, but really, we're no better off after we did it than before, other than the fact that we had a little bit of accretion here or there. So we're looking for something that would add a valuable deposit franchise or a capability in different lendings or different lending sectors or different geographic sectors that would add some enhancement to the franchise value of our company. Now clearly, our stock is disconnected from our fundamentals over the last 20 months. And that's hard to understand because our asset quality has never been better. Our profitability has never been better. We've not failed to meet earnings estimates and so forth, so you would think we would just be zipping right along. But there've been a lot of negative articles about CRE and being one of the most active CRE lenders in the country. I think we've been heavily associated with that. And instead of trading at a couple of multiple premium to peer group, where we have historically traded because of our above peer group growth prospects and above peer group performance metrics, we're trading several multiples short of peer group despite the fact that we're putting up 1.90% as return on assets and a high return on equity and top decile net interest margin and top decile efficiency and superb asset quality. So clearly, it's harder to do the math. It's pretty simple. It's harder to do triple accretive acquisitions when your stock price is trading at several multiples discount versus when it's trading at several multiples premium. So we're very active in looking at M&A opportunities, but we're realistic on the numbers. Our stock price right now is going to make it hard, not impossible. But you want to stay in the game and maintain touch and understanding with what's going on in the market because those opportunities will become more attractive as our stock price returns to a more normal relationship to our earnings and book value and so forth.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [28]
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 With that, I've monopolized too much time already. So questions from the audience, please? Just raise your hand if you have questions for George. Okay. Some questions up there. Okay. In the front here. One second.

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 Unidentified Analyst,    [29]
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 I thought you've made an interesting comment on, called it a -- removing the parent bank holding company. You called it an unused lake house, right? I thought it was quite intriguing. Just talk about that and then also relationship. You said you're preparing for DFAST and various regulatory regimes. But prospectively, those conditions could change. So are you thinking that those are costs that could potentially come out?

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 George G. Gleason,  Bank of the Ozarks - Chairman, CEO & President   [30]
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 Well, that's a good question. And none of us know what regulatory changes will happen and what regulatory changes will not happen. We did have a parent holding company until May 31 of this year -- June 26. Thank you. Wrong date, June 26. And we made a decision. We asked ourselves the question about a year ago, I guess, or a little less than that. "Gosh, why do we have a holding company?" We haven't used it for anything for years, and it leads to duplicate regulation. It leads to redundancy in accounting and administrative processes. So we asked ourselves a question. So I called. We couldn't answer it ourselves, so I called a good consulting friend of mine. And I said, "We're thinking about merging our holding company and the bank. Do you see any reason we can't?" And he said, "Well, I'm not sure you can do it." I'm not -- and we talked on a few minutes, and he said, "Well, I'm not sure you can't do it either. I've just never seen it done." So I said, "Well, start your meter running and do some research and see if there's any reason we couldn't do it." And unless we're going to own a bank in a foreign country, which doesn't seem to be on our horizon in the foreseeable future or engage in other activities of a very limited nature that you can engage in a holding company you couldn't in a bank now. There just didn't seem to be any reason to it. So we announced we were going to do it, proceeded to accomplish that transaction. And I think at first, drew a lot of suspicion from investors who felt, "why are they doing this. There must be something wrong," and there's nothing wrong at all. It's just we looked at it. And to use my lake house analogy again, said, "Gosh, we're paying all the expenses of this. We're putting up with all the administrative burden of this. We're not using it. Why don't we get rid of it and spend that time and energy and effort and money on other things?" And as we've done it now, at least one other bank has followed suit, announcing they're going to do it. And I saw a recent poll of a number of other banks that indicated that more than half of those banks that were told, it was a small group, were considering eliminating their holding company as well. And years ago, if you're a very small bank, a holding company allows you to significantly leverage and access financing. If you're a very big bank that does business overseas, there's obviously a reason for that. But the vast majority of banks in our size range probably are asking themselves the question now, "Gosh, why do we really need a holding company?" And it's -- Federal Reserve regulation is not as burdensome as your OCC or FDIC, whoever your primary bank regulator is, but it is another layer of regulation and another set of examiners and another set of reports that you have to deal with. And the duplicate accounting and administration of a holding company structure does take some time, resources and money. So getting rid of all that seemed like a really obvious thing. And as you can tell, my wife and I had a lake house for a number of years. And after the kids got older, we never went to it. So that was my perfect analogy for the holding company. You've got it. You pay all the cost of it, and you never use it. You need to get rid of it.

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 Matthew John Keating,  Barclays PLC, Research Division - Director and Senior Analyst   [31]
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 Well, regrettably, we are out of time. But please join me in thanking George for his presentation. There will be a breakout session immediately after this. Thank you.




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