Q1 2018 Bank of the Ozarks Earnings Call
Apr 12, 2018 PM UTC
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OZRK.OQ - Bank of the Ozarks
Q1 2018 Bank of the Ozarks Earnings Call
Apr 12, 2018 / 03:00PM GMT
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Corporate Participants
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* George G. Gleason
Bank of the Ozarks - Chairman & CEO
* Gregory L. McKinney
Bank of the Ozarks - CAO & CFO
* Tim Hicks
Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR
* Tyler A. Vance
Bank of the Ozarks - COO & Chief Banking Officer
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Conference Call Participants
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* Blair Craig Brantley
Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst
* Brian Joseph Martin
FIG Partners, LLC, Research Division - VP & Research Analyst
* Catherine Fitzhugh Summerson Mealor
Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP
* Jennifer Haskew Demba
SunTrust Robinson Humphrey, Inc., Research Division - MD
* Kenneth Allen Zerbe
Morgan Stanley, Research Division - Executive Director
* Matthew Covington Olney
Stephens Inc., Research Division - MD
* Matthew John Keating
Barclays Bank PLC, Research Division - Director and Senior Analyst
* Michael Edward Rose
Raymond James & Associates, Inc., Research Division - MD, Equity Research
* Stephen Kendall Scouten
Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Bank of the Ozarks' First Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Tim Hicks. Sir, you may begin.
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [2]
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Good morning. I'm Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bank of the Ozarks. Thank you for joining our call this morning and participating in our question-and-answer session.
As discussed last quarter, we made what we hope is a significant enhancement to our earnings release process by publishing management comments with our earnings press release earlier this morning. These comments are available on the Investor Relations section of our website.
In today's Q&A discussion, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.
Joining me on the call to take your questions are George Gleason, Chairman and CEO; Greg McKinney, Chief Financial Officer and Chief Accounting Officer; and Tyler Vance, Chief Operating Officer and Chief Banking Officer.
We're very pleased to report our excellent first quarter results, and we'll begin by opening up the lines for your questions.
Let me ask our operator, Sandra, to remind our listeners how to queue in for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question comes from the line of Ken Zerbe with Morgan Stanley.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [2]
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While we're starting, just in terms of expenses. Obviously, I saw your expense guidance for the rest of the year, that's going to be lower than what it was in the first quarter. Can you just talk about some of the dynamics behind that, like, how much was your first quarter expenses related to sort of unusual items and I'm saying (inaudible) the unusual expenses, not the core infrastructure buildout, but then how much of that goes away and how do you think about what you need to spend over the course of the year?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [3]
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Ken, Tim Hicks here. I'll start by answering that question. Obviously, you saw the salaries and expense line increased $7 million on a linked-quarter basis from fourth quarter. And you saw in our management comments that we discussed the deferral of some of those costs was lower this quarter in accordance with FAS 91. We defer cost on loan originations. So as you saw in our management commentary, we did have lower originations during this course, so we had lower deferred costs. As you also noticed in our management commentary, we have more -- a net more deferred loan fees than net costs, so it's accretive to our margin going forward. But if you look at just that salary line that increased $7 million, roughly half of that was due to lower deferred costs and the other half was due to just normal increases in salaries and benefits that we typically see during the first quarter.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [4]
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Got you. Okay. Because I guess I'm just thinking the guidance that's going to be lower than where it was this quarter. I mean, obviously, it's a positive, but just if we look back over the last year or 2 years or 3 years, we've seen such strong growth in expenses. I'm just trying to get my head around, aside from a couple of million dollars of comp, what's driving sort of much more to that dramatic slowdown in expenses versus what we've historically seen?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [5]
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Ken, George Gleason here. Let me comment on that. We are, as we've talked about for a number of quarters now, nearing a point where the majority of this infrastructure build is complete. We will be continuing to add additional people to headcount in Q2 and, to a lesser extent, Q3 and Q4, but we believe that some of our consulting and other costs that have been involved in that buildout of infrastructure will be headed downward as the year progresses. So when you factor in, continuing to add additional people and you factor out the declining expectations for expenditures on consulting and other costs over the course of the year and you assume a more normalized rate of deferral of costs related to a more normalized origination volume, we actually think that our noninterest expenses will be lower in future quarters than they were in Q1. And that's what our projections and that in budget reflect.
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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [6]
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Great. No, I just wanted to make sure I understood. I think it's good and that clarity helps certainly. The second question I had just in terms of can you just comment a little more broadly on the outlook for loan growth. Obviously, I want you to address the decline that you saw in unfunded balances this quarter, but what are you seeing from a broader environment, like, why should that not keep going down?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [7]
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Ken, I'll -- it's George Gleason. I'll address that. We had a lower-than-expected volume of originations of new loans at RESG. Our fundings and so forth were very much in line with our expectations. That lower origination volume, we believe, is really just a temporary phenomenon. We had a number of transactions that we had expected and hope to close in Q1 that have rolled into the month of April. There were specific reasons for each of those that or none of them systemic or chronic issues. It's just a lot of sort of one-off issues that caused those transactions to roll over a few weeks, so we have expectations for a very good closing month in April and so forth. So our expectation, to answer your first question on loan growth, is unchanged. We expect that our 2018 loan growth in non-purchased loans will exceed our 2017 year growth in non-purchased loans. We believe, as we said in the management comments, that, that downtrend in the unfunded balance of loans already closed that we saw in Q1 is not a trend, that, that's just -- that number will move around quarter-to-quarter. We expect that number will tend to move up over time and not down, so we certainly don't think that one quarter result is a trend.
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Operator [8]
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And our next question comes from the line of Michael Rose with Raymond James.
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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [9]
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I have a question on capital. Earlier this week, the -- because I put out a proposal as it relates to CCAR moving the time line where the amount of capital that you would need through this stress scenarios to 4 quarters from 9 quarters. And if that's past, it's our belief that, that could trickle down to the DFAST banks. And I know you guys have correctively raised some capital. So I wanted to get your thoughts on capital and if this would help. And then b, given where your stock is at any point, would a buyback make sense?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [10]
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Michael, it's George. Let me take that and then Tim may -- since Tim works a lot on our capital issues, he will probably want to weigh in on that as well. Number one, I would tell you we appreciate the fact that the regulators are looking at capital and the leadership of the Federal Reserve. And in looking at that, we have not had time with other things, we've had going on in the last couple of days to look at either their first or their second proposal in any detail, so it would be premature to comment on the impact of those proposals and how that might filter down to us. In regard to a stock buyback, we got a tremendous history of growing our balance sheet. We've raised capital with the expectation that we will need that capital for future growth. We continue to be very positive on our growth trajectory. You noticed, I think, in Tim's management comment that our trailing 4 quarters growth in non-purchased loans is, I think, 33.8%. Tim, is that right?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [11]
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That's correct.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [12]
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So we would expect that our forward growth and earning assets, particularly non-purchased loans, to a lesser extent, securities, would ultimately utilize all of the capital that we got. And we're excited about that because we believe that's very good for shareholders.
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [13]
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Yes, Michael, this is Tim. What I would add to that is what I saw in that proposed rule was also a static environment where you took out growth. Obviously, when he talked about a raise in capital last year, it was because of our expectations for robust growth. So if the rules would allow us to have a static review of that, that obviously would be very beneficial. But I think too soon to tell at this point. Obviously, it's addressed to CCAR banks, and I would imagine that would trickle down to DFAST as well. Obviously, there's things in Senate bill 2155 that it would be positive as well. So we're watching that very, very closely, and all of that is very positive.
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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [14]
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Okay. Maybe a follow-up just back to Ken's question on expenses. I noticed that you guys are winding down the mortgage business. Can you give us a sense for what would come out related to that in terms of expenses?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [15]
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Most of that is out in Q1. There's some small incremental amount and the same on the small ticket leasing business that we started winding down in Q4. Most of that is out. So there's a little bit more of efficiency gain, but it's not a meaningful number in whatever savings there are in that regard will be offset or more than offset with the addition of people in other lines of business where we're having a significant growth.
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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [16]
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Okay. That's helpful. Maybe one more for me for Tyler. Any update on the spin-up campaigns and kind of where we stand and just any thoughts on general deposit environment would be helpful.
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Tyler A. Vance, Bank of the Ozarks - COO & Chief Banking Officer [17]
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Certainly, Michael, happy to take that. Q1 spin-up was a very nice contributor to our deposit growth. You noted in our management comments that was $641 million. Figure 21 on Page 23 gives some more metrics related to that. That included organic growth of $654 million and another quarter and a string of quarters where we paid down broker deposits. Those decreased about $13 million. The announcement of offices contributed very nicely, and you'll note also in our management comments that net checking was about 7,500 in Q1, so that's an excellent start to the year. We're proud of that number. Currently, related to spin-up, we have 33 offices in 22 different markets. You'll note that's down some from Q4 and the beginning of Q1. We needed a little less spin-up recently given our strong performance in the New York office. Now that was a little less in Q1. The New York office grew about $57 million, but that follows a year of growth last year of $1.4 billion. And our expectation for that deposit-gathering team is that they would have another significant contribution to our growth this year. That's some very nice deposits in their pipeline. So excited about that as well. In terms of just competition for deposits, we did refresh some spin-up special offerings after the Fed move. And then really in response to some additional promotional rate offerings, we're seeing competitors put into the market. Our CD specials in those 33 offices that I mentioned range now from 11 to 15 months, and those APYs are anywhere from a 1.80% to a 2.11% APY. Those are competitive offerings. They're not always the best offering in those markets. We've seen competition, as I mentioned, in promotional offerings increasing recently, but we still think spin-up will be a nice contributor to our growth this year.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [18]
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Michael, I might add on that. Our core spread increased, I think, 9 basis points in Q3 and 9 basis points in Q4 of last year and increased 4 basis points in Q1. And Tyler and the deposit team had been very disciplined in trying to hold the line on deposit costs in Q3 and Q4, so there was a little bit of a step-back effect to that, we think, in Q1 where we had to push a little bit more, but we still had a 4 basis point positive difference between our increasing yield on non-purchased loans and our cost of interest-bearing deposits, so we thought that was a very good outcome. And Tyler and his team did a really good job managing that cost of deposits given the growth we achieved over a multi-quarter period of time there.
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Operator [19]
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And our next question comes from the line of Jennifer Demba with SunTrust.
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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]
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George, you said some of your loans on RESG slid into the second quarter. Just curious what you saw in paydown activity this quarter versus maybe third and fourth quarter of last year.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [21]
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Let's see if I can give you that. On the -- Tim, is this that of all or is this just RESG?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [22]
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That's just RESG.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [23]
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Okay, yes. I think our repayments were about $800 million in round numbers on RESG for the quarter. Obviously, we had $525 million plus in net fundings, so we had gross advances of about $1,325,000,000, again, round numbers on that for RESG.
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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]
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Okay. And how did that compare to the last couple of quarters?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [25]
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It's in the middle. We've had quarters where there were more and less in each of those metrics over the last, say, 6 or 7, 8 quarters.
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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]
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And George, you said earlier that you think you're kind of nearing the -- you're in the late innings of the infrastructure build. What do you think is kind of a normalized expense growth level for you guys given the level of loan and revenue growth you like to have?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [27]
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Jennifer, I don't know if we're prepared to give you a comment on that. I think we would leave that with the comments in the -- in our prepared management comments, which suggest that, number one, we think noninterest expense in the remaining 3 quarters of this year will be less than noninterest expense in the first quarter, and I've talked about the reasoning for that. And the biggest factor there is the fact that we had a low level of deferred loan origination costs in Q1. And secondly, again, pointing to the management comments, we expect that our efficiency ratio will improve over the course of 2018. And that by the end of the year for the full year, that efficiency ratio will be much closer to the 2017 efficiency ratio than what our first quarter results would indicate. So I think I'll leave it at that, and we may have some run rate guidance in the future conference call that would apply to future years.
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Operator [28]
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And our next question comes from the line of Stephen Scouten with Sandler O'Neill.
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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [29]
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So wanted to follow up on the kind of discussion around the unfunded commitments and kind of what maybe gives you confidence that, that number will start to creep back higher at -- in the coming quarters. And maybe, George, if you could talk a little bit about you said you had maybe $525 million in net new fundings and $1.3 million of loans that advanced on the unfunded commitment book. So is that a similar dynamic? Or did that unfunded book declined because a greater number than average of those came over to the funded side, if that makes sense.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [30]
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No. As I said in response to Jennifer's question, our net funding number, our gross advanced numbers and our repayment numbers for Q1 were very much sort of in the middle of the pack of where those numbers have been over the last 6, 7, 8 quarters. So there was nothing unusual about that. We just had a number of closings that slid from Q1 to Q2. And as I said, those were -- there was not any sort of systemic reason for that. It was a lot of different one-off issues that delayed things 15 to 45 days. So we think we'll be back on track, and I would expect to see a generally positive trend in the unfunded balance of close loans for the remainder of this year. And in future years, we expect that balance will grow. Obviously, as we saw in the first quarter, there'll be anomalous factors that would cause it to not grow in particular quarters, but we continue to think the trend is up.
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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [31]
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Okay. But it's not necessarily going to jump right back to grow in $600 million, $700 million a quarter. Is that maybe a fair way to characterize it?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [32]
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Well, I think that's just going to be dependent upon how many loans we get closed in particular quarters and what the paydowns and curtailments and other things so and back (inaudible) really mean something. Let me explain what I mean by curtailments. A lot of times as we're getting to the end of a loan, it becomes clear that the sponsors are not going to spend all of the money budgeted in that loan for various reasons, and a lot of our loan documents allow us to curtail those commitments when we mutually agree that they're not going to be needed so that we don't have total capital for balances that are never funded.
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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [33]
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Okay. That's helpful, that's helpful. And maybe talk a little bit about the marine and RV portfolio. It looks like it grew maybe $225 million this quarter. Is there a point where that portfolio starts to get too big or you kind of fill your appetite for that -- those loans or you still feel pretty good about continuing to grow that at a similar pace as well?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [34]
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We feel very good about what those guys are doing. We're monitoring the quality of it very closely. We're having very low levels of past due and repossessions in that portfolio, but we're doing a pretty good forensic dive on things that do become past due and do result in a repost to make sure that we're properly accounting for all factors that we ought to be accounting for in our underwriting of those credits. We've been able to get the yield up on those credits as rates as it moved upward. So we're feeling very good about that portfolio and the -- what our team is doing there.
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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [35]
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Okay, great. Maybe one last one for me. Just you mentioned a positive move in the core spread, which is great to see yet again. Do you -- you also said in quarters maybe where we don't get a rate hike that, that could be under more pressure. Can you maybe give us an idea of is that -- when there's no rate hike, is that maybe a flat core spread or do we actually see that decline? And maybe also of that $640 million in deposit growth, how much of that came from the higher [or] costs like promotional spin-up stuff and how much of that is maybe more, I don't know, true core, if you want to call it that?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [36]
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I don't know if we can give you that, but I'll tell you what I would point you to -- Tim, where is that?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [37]
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(inaudible) Page 12.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [38]
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Hold on just a second. I'm -- yes, if you look at Page 12 of the management comments, I think this graph -- this data tells you a lot. You can see over the last 7 quarters, which is really from the second through the most recent 6 Fed rate increase, that core spread has improved 42 basis points over that period of time. Clearly, we're benefiting from a rising rate environment. If you go back and look at a similar time period from Q1 of '14 through, say, Q4 of '15, that spread declined 28 basis points when we're in an environment where the Fed was essentially on hold and we were near 0 on the Fed funds target rate. So I think if we enter into an extended period where the Fed is on hold and the Fed fund's target rate is stable, that would be an environment that would tend to -- is reflected in that part of the data in that graph. I think that would tend to put some pressure on our net interest margin. Obviously, as long as the Fed is moving upward, we think that tends to help us improve our core spread, which tends to support our net interest margin. I would also take you to Page 10 of management comments, Stephen. And if you look at the net interest margin on the page there, our net interest margin in Q4 was 4.72%. Our net interest margin in Q1 was 4.69%. That -- almost that entire difference is a result of the lower tax equivalent yield on tax exempt securities resulting from the lower tax rates. If we had had in the first quarter the tax rates applicable in the fourth quarter of last year, our net interest margin would have rounded to 4.72%, so we would've had an essentially flat NIM, a fraction of 1 basis point downtrend there, I believe. We would have essentially a flat NIM if we had the same tax rate. So that suggests to us that the work we're doing on the core spread and the good job that Tyler is doing managing the increases on our deposit cost as we grow deposits and deal with a rising rate environment or beginning to have a nice impact on the attrition in that spread. I would also point out to you the data on Page 8, which is the graph that shows our yield on non-purchased loans and our yield on purchased loans, and we've made a lot over the years about the fact that as our higher-yielding purchased loan portfolio runs off, that tends to put a downward impact on our margin. And as you can see from that graph, our non-purchased loan yields are not quite yet at the same level as our purchased loan yields, but they're a lot closer than they were a year or 2 years ago, and that convergence in those yields, which we think will likely continue. Now there will be erratic movements from quarter-to-quarter, but we think that convergence will likely continue, and that has positive implications for our net interest margin going forward.
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Operator [39]
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And our next question comes from the line of Matt Mooney (sic) [Matt Olney] with Stephens.
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Matthew Covington Olney, Stephens Inc., Research Division - MD [40]
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I wanted to go back to the core spread discussion, and I'm just curious kind of what your thoughts are from here. You mentioned there was a 4 basis point expansion in the first quarter compared to the 9 basis point expansion in late 2017. And if we assume that the Fed continues to march up interest rates, is this a good way to think about the range of this expansion in the next few quarters somewhere in that 4 to 9 basis point range? Or are you biased more towards the lower end of that given the recent trend?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [41]
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Well, Matt, as you -- if you look again at Page 12, that little green box at the bottom of that chart, as Fed has raised rates, we've had a couple of quarters where we were 9 basis points and improving core spread. We've had 1 quarter where we were 0 basis points and improving core spread. If you look at that, the cumulative of that is 42 basis points of improving spread over, Tim, 7 quarters, so the averages is about 6 basis points. And it's hard to know how all of the dynamics and moving parts play out, but we would hope that we would be plus or minus, a little bit around that average, as we go forward as long as the Fed is continuing to increase the Fed funds target rate, which based on recent comments and transcripts of their conversations and so forth on that subject seemed to suggest they're inclined to continue to do so.
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Matthew Covington Olney, Stephens Inc., Research Division - MD [42]
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Okay. And then on the leasing division, I think we talked last quarter about you restructuring that division. I think you're keeping parts of the business aviation group. Any update you can provide on that group? And when would you expect that group to contribute more meaningfully to the positive overall loan growth?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [43]
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Well, the business aviation group has been moved over from our leasing division to the Community Banking group. We feel very positively inclined toward that group and think they will be a source of positive growth. It will not be a huge line item for us, but it's one of many contributors to growth in our Community Banking division. The -- I think the more important part of that story in the short run for this year and next is, is the small ticket part of that portfolio that was about $97 million, I believe, when we started working our way out of that was about $80 million at the end of the last quarter. And that portfolio has contributed a disproportionately large percentage of our losses the last few years. We've had so little losses. Nobody's asked about the composition of them, but I think our net charge-off ratio in the first quarter was 4 basis points but annualized, which is almost nothing, but most of that almost nothing number came from that portfolio. So that portfolio winding off really quickly, and we think that's a positive factor.
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Operator [44]
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And our next question comes from the line of Catherine Mealor with KBW.
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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [45]
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One follow-up on the margin discussion. And clearly, we've talked about how the LIBOR impact had a positive impact on your asset data this quarter. I guess question one on that is just remind us how much of your variable portfolio is tied directly to LIBOR versus prime. And then secondly, can you talk a little bit about the competitive dynamics that you've seen year-to-date on pricing. I mean, clearly, you're benefiting from the increase in said funds in LIBOR, but have you seen any kind of tightening on credit spreads and pricing kind of outside of just rates moving higher?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [46]
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Of course. Competition is always a huge factor for us, Catherine. As you know and as you and I have discussed a number of times, we did see a very competitive environment in Q1, which is not I think. And that's not surprising because the Fed's been moving quite a bit. The tax rates moved. And also, a lot of our competitors get annual allocations of budget for them to loan out. So you typically, in the first quarter, see a lot of exuberance and aggressiveness from your competitors in getting started on their New Year's allocation for loans. And as they fill up that bucket a lot of times, you see that aggressiveness diminish over the course of the year. And I think that's one of the reasons that we've traditionally had exceptional loan growth in Q4 of each year as a lot of our competitors have filled their budget, earned their bonus and gone to the sidelines by Q4, and it lets us be even more rational and prudent in what we do. So it's hard to know how all that competition that we saw in Q1 really translates out over the course of the year. I think that does tend to normalize and rationalize as we go through the year. But clearly, it's a very competitive environment. What we had to do and have always done in a very competitive environment is keep our focus on our priorities. And priority number one is asset quality. So giving on credit terms or getting competitive on credit terms is really a nonnegotiable thing for us. We protect credit quality as our paramount mission. Secondly is to maintain profitability. And we will make adjustments to our pricing as we think were appropriate based on return on equity and so forth and you have a little room to move, but you don't have a ton of room to move and still meet our profitability standards. And then growth is the tertiary consideration. So if we're faced with a situation where we have to give on credit quality to achieve growth, we're not going to do it. If we're faced on a situation where we're going to have to get on pricing to achieve growth, we're only going to do it if we can still achieve our target minimum return on equity numbers. So you just got to be disciplined and continue to execute well. I think the one thing that really helps us is that our ability to execute for our customers and the confidence that our customers have in us being able to deliver what we say we're delivering to execute with excellence and the transactions gets us paid more than our competition in many, many transactions. So we're relying on the reputation of relationship, our execution and expertise, our discipline to continue to maintain our credit quality and our profit margins in whatever sort of competitive environment we're in. Tim can answer the question on LIBOR. I've taken enough time to answer your second question that he has with that on your first question.
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [47]
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Hey, Catherine. As you were asking about variable rate loans and how many were in LIBOR, so 79% of our non-purchased loans are variable, and 83% of those are either based off of 1-, 3- or 6-month LIBOR. The vast majority of those are based off of 1-month LIBOR. Don't forget that we do have 42% of our purchased loans that are variable. Those are roughly half and half between LIBOR and something else. So if you look at our total loan portfolio, it's actually 79% of our total loan portfolio is based off of either 1-, 3- or 6-month LIBOR.
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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [48]
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Okay, that's super helpful. And then one follow-up on the expenses. Is there -- can you -- I know you mentioned that about half of the $7 million increase in salaries came from the FAS 91 deferral of loan positive, is there a way to quantify what that typically is on a quarterly basis?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [49]
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It's going to vary from quarter-to-quarter just based on what George indicated in our originations in any particular quarter. I don't have the numbers in front of me that would suggest what it was over the last several quarters. But if you just link at the fourth quarter, it was roughly half of that change was from that.
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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [50]
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Okay. Is it typically a percentage of originations? Or kind of what's the way of modeling it?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [51]
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Yes, I mean, our accounting guys look at it every quarter, and they do have a percentage that they come up with every quarter, and it varies on a lot of different factors.
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Gregory L. McKinney, Bank of the Ozarks - CAO & CFO [52]
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Catherine, this is Gregory. Actually, it's -- there's a fixed element of it and there's a variable piece of it that's consistent with the requirements under FAS 91. So every loan has a fixed component dependent on the loan size as well as the variable component based on size. And to Tim's point, that does move around. We look at that -- we do a detailed review of that annually. And then quarterly, we're doing updates. Some of those quarterly updates are more extensive than others, dependent on what we're seeing in changes in projections of pipelines and trends. But that is, to Tim's point, about half of that increase in the salary line was directly attributable to the lower closing and the fact that we had a fewer cost deferrals in the first quarter relative to what that has been running over the last 3, 4, 5, 6 quarters. So...
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Operator [53]
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And our next question comes from the line of Blair Brantley with Brean Capital.
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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [54]
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Just had a quick question on the purchased loan yields. Were there any prepayment benefits this quarter?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [55]
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There are always prepayment benefits and minimum interest benefits in any quarter.
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [56]
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Blair, this is Tim. The number you may be looking for that we often get asked is how much additional accretion income we had. This year -- this quarter, it was $12.7 million in Q1. I think that was roughly $14 million in Q4. But as George said, we always have some prepayment activity in the quarter, but that number should give you a sense of the accretion income impact.
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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [57]
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Okay. And then, I mean, I know this was probably a hard question to answer. But in terms of convergence with the purchased and non-purchased yield, is the something you think that could happen this year? Is that what you see out there or...
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [58]
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I think it depends on how many said moves we have, but yes, you're right. It's hard to know and the purchased loans vary a little bit. But if we get several more Fed moves, I would not be surprised if they converge the stores at the end of the year.
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Operator [59]
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And our next question comes from the line of [Bryce Nasser] with KBW. (Operator Instructions)
Our next question comes from the line of Matthew Keating with Barclays.
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Matthew John Keating, Barclays Bank PLC, Research Division - Director and Senior Analyst [60]
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My question is on fee income. I just wanted to confirm, you did call out the BOLI debt benefits this quarter, the $2.7 million. It seemed like that's nonrecurring. Is that the correct way to think about that? And maybe just more in general on fee income. Do you think this is sort of a low level? A lot of items were down a little bit, understanding mortgage is down because it's down permanently, but how do you view sort of the fee income trajectory as we move throughout 2018?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [61]
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Good question. And we tend to think of BOLI income debt benefits as being onetime items. Although with many hundreds of people insured as we have, we've got an active BOLI program. In Bank of the Ozarks, we've made a number of acquisitions and acquired substantial BOLI portfolios in those acquisitions. So given the volume of people covered by our program, it's not unusual to have quarters where we have BOLI debt benefits. But you can't really project them or -- they're random events, so we take them out of our run rate. So in our view, instead of a $0.88 EPS quarter, it was an $0.86 EPS quarter was the way we look at it. Correctly, it is correct to assume that mortgage is going away. As we said, we'll have nominal mortgage income this quarter and essentially none thereafter. Service charges are down from a year ago because of the Durbin Amendment, but actually, we thought the $9,525,000 in service charge income in Q1 was a good number. Q1 is seasonally our lowest quarter of the year in service charge income, so we would expect that number to go up. Had a good quarter -- I think it was a record quarter interest income, wasn't it Tim?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [62]
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I believe it was.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [63]
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And that type continues to be a focus for us. Our other income from purchased loans, because of the continued declines in that purchased loan portfolio, the volume of that purchased loan portfolio is going down. That number probably trends down over time. Likewise, gains on sale is driven primarily by liquidation of OREO assets, and that portfolio continues to wind down. So that line item will have a downward trend longer term. On the other hand, loan service maintenance and other fees has had a very nice trajectory over the last several quarters. That includes unused fees and asset management fees from our RESG portfolio and other underwriting and certain fees that we charge. I think that number has an upward trend to it over time, that should be very beneficial to us. So there are a lot of moving parts there. Some going up, some going down, but we think the first quarter number apart from the BOLI income was probably a pretty conservative number.
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Matthew John Keating, Barclays Bank PLC, Research Division - Director and Senior Analyst [64]
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That's very helpful color. My second question would be on the name change. Just curious for the back story sort of how long have you guys been contemplating this transition. And maybe how did you end up on Bank OZK given that you do expect to be entering the national markets and how you elected to go without that? I know there's obviously a lot of options, but I'd love to hear some additional color around that.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [65]
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We've been contemplating this name change for several years. And the decision to go with Bank OZK was a decision that I recommended to our senior management. And after a lot of discussion, they agreed with it. And the idea was to protect and maintain the significant brand equity that we've built in the name Bank of the Ozarks over many years. Our customers that do business with us as Bank of the Ozarks know us well. They obviously lack us largely because we're adding thousands of net new core checking customers and other customers every month. So we obviously have a good reputation, a good relationship with our customer base, a reputation in the investment community for high performance having been named now 12 times in the last 8 years as the top-performing bank in our size group in the country. So we wanted to protect that brand equity and that value that we've created through hard work and excellent performance. And we felt like the name Bank OZK would be close enough to Bank of the Ozarks that our existing customers and the communities in which we have deep relationships would immediately recognize the name as a natural evolution of Bank of the Ozarks. On the other hand, it is an edgy name putting the word bank to the front of it seems to have sort of a European or international flair to it. The OZK we felt like just being 3 letters would be a very modern name and would convey a sense of technology surrounding it, and technology is a huge focus for us and a significant part of our recipe for the future. So we just felt like we had a name here that gave us the best of both worlds. It protected the brand equity, the reputation, the relationships we had and yet was very forward thinking and would really travel well with us across the country. Of course, we're already doing business in almost every state now, have customers in almost every state now. So it would travel well with us. And even thinking many years down the road to when we might be traveling outside the U.S., we thought it was a name that traveled well internationally. So as we decided that the management level that was the name we wanted to go with, we realized that we're not brand experts per se, so we engaged a branding firm to do a series of focus groups and a study to not suggest alternate names, but to just tell us how that name would be received. And that focus group focused on, I think, about 500 people. That included existing customers and noncustomers in our existing markets and noncustomers in markets where we are largely unknown. And the name scored extremely well among all those different groups and accomplished our objectives of being very modern, being very international, but having a warm feel that customers would embrace and, in the case of our existing markets and existing customers, being immediately recognizable as a natural evolution of Bank of the Ozarks. So we feel really good about it. And based on the study we've done, we think we've picked a really good evolution of our name.
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Operator [66]
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And our next question comes from the line of Brian Martin with FIG Partners.
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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [67]
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Just a couple of things for me. Just the geography of the loan growth, George. Any particular markets, I guess, driving more of that growth if you look at maybe the top 2 markets as far as the growth this quarter you can comment on?
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Tim Hicks, Bank of the Ozarks - Chief Administrative Officer & Executive Director of IR [68]
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Yes. The top 2 markets are really unchanged. It's been in New York and Miami. This particular quarter, Miami actually had more than New York, but I think that's just based on timing and other things. But Dallas, Chicago, Atlanta, Washington, D.C., Philadelphia, those are some of our top markets in the quarter where we saw originations. So again, really good diversification by geography and some really great markets.
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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [69]
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Okay. And just big picture on the loan growth. I mean, I think the loan growth, at least on the non-purchased side this quarter, was greater than 3 of the quarters last year, I guess, is there any way to, I guess, in the past it doesn't seem like there's been or more recently in the past, there's not seem to be a seasonality issue with these -- with the growth we're seeing by quarter. I guess in general, I guess, you guys have any feel for seasonality this year? Or should it be more -- the originations be more -- closings to be more stable going forward? Or I guess, is there any way to think about that?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [70]
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Brian, I would tell you our current expectation is that we will have at least 1 quarter this year that will be less than Q1's growth and at least 1 quarter this year that we'll be more than Q1's growth. Now that could all -- that deck could get totally shuffled by prepayments or changes in the velocity or timing of loan originations, but we think this was really a good quarter but a quarter that is not the best or the worse that we'll have this year. We think it's in the middle somewhere.
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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [71]
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Okay. That's helpful. And just on the expenses and the impact this quarter from the lower originations. I mean, could the bounce back next quarter be greater? It sounds like some of those originations got pushed in the Q2. So I mean, could that swing next quarter be greater than it is in Q3 and Q4, just given some of the bounce back or some of the stuff that got pushed from Q1 to Q2, is that fair to think about at least that element?
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [72]
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Brian, that is really hard to project. What I would tell you is, I think it -- we'll tend to be more level in Q2, 3 and 4. And the reason for that is yes, we had almost $1 billion, I think it was $960 million that we thought we would get closed in March that slid to April, so that's a big volume. A lot of the transactions that we worked on in Q1 and particularly transactions of size were probably not close to Q3 because they're large transactions that we've got signed up and are working through the approval process, but their -- the size complexity and the moving parts of those transactions will take a while. So I think what got pushed from Q1 to Q2 sort of levelize is Q2 with what we would expect to see in Q3 and Q4. Again, these things tend to move around a lot. And if you look up a projection of closings 1 week versus a week or 2 or 3 later, there's always a lot of movement in those things moving a month or 2 or 3 one way or the other, so it's impossible to predict. But right now, our thinking is, is that we end up with the rest of the year being more or less level. And I should clarify that level among Q2 and Q3 and Q4 originations looking very similar in volume, much higher than Q1.
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Operator [73]
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(Operator Instructions) And I'm showing no further questions. I'd like to return the call to Mr. Gleason for any closing remarks.
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George G. Gleason, Bank of the Ozarks - Chairman & CEO [74]
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All right. Thank you, Sandra. A few days ago, as I mentioned earlier, we were named the top-performing bank in the country in our size group. This is the eighth consecutive year that we've been named as the top-performing bank by one or more leading industry publications. This is a tremendous honor achieved through the hard work and the teamwork of all of our employees. We're very pleased with our past accomplishments and we're very excited about the future. Our first quarter results preside a strong start for 2018.
There being no further questions, this concludes our call. Thank you so much for joining us today.
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Operator [75]
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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.
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