Bank of the Ozarks Earnings Call NUGGETS: Loan Growth Breakdown, Bold Color on New Loans

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On Friday, Bank of the Ozarks, Inc. (NASDAQ:OZRK) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Loan Growth Breakdown

Matt Olney – Stephens Inc.: Good to see the loan growth accelerate in 2Q. I know some even talk on that for a while, so that’s definitely good to see. Do you know what percent of this growth came from your real estate specialties offices versus your traditional offices and do you have a breakdown of loan type?

George Gleason – Chairman and CEO: I can give you some color on that, yes. The majority of the growth came as we projected it would from our Texas offices and our Real Estate Specialties Group office and Dallas led that as we predicted in January, the second largest contributor to growth. In the quarter, was our Little Rock offices and the third largest contributor was Charlotte. We said at the beginning of the year that our Texas offices would contribute most of the growth this year. Little Rock would be a strong second. Charlotte would be a strong third and that’s exactly the way it played out in the quarter. At June 30, our non-residential/non-farm loans, our CRE loans were 39.8% of the portfolio. That’s up about $44 million from 39.3% at March 31. Our construction and land development book was 26.3% of the portfolio, up from 25.8% at March 31, that’s a $33 million contributor to growth there. Multi-family was down about $11 million, (indiscernible) was down about $3 million, residential one-to-fours were up a couple million, and our C&I portfolio grew about $22 million and accounted for 6.6% of the portfolio at June 30 from 5.8% of the portfolio at March 31. So, those are sort of the big movers in the numbers and as expected, the construction and development in the CRE book were the largest two pieces, but we did have a nice contribution to grow $22 million from our C&I book which was not something we had expected would be a big contributor this year. So, we got an extra contribution buyer.

Matt Olney – Stephens Inc.: Then on the margin side the compression in 2Q was a little bit more than I was expecting. It looks like the core loan yields came down pretty heavy for the second straight quarter. Was there something unusual in the quarter that caused that? Because the momentum of those core loan yields suggest that the overall margin could be below your guidance, but it sounds like you are maintaining your guidance for the next few quarters.

George Gleason – Chairman and CEO: That did come in and it was a result of just a lot of little unusual impacts there. Included in those yields are late fee incomes, prepayment fees that on loans that flow into income, just accounting adjustments on loans, charge-offs, non-accruals, there are a whole bunch of adjustments. If you go through all of those kind of odd pieces that are not just interest rate, they all came in on the low side and were kind of down for the second quarter. Our projections for the third quarter just assuming a normalized combination of those factors suggest that if you factor all those things in, I actually think we’ve got a pretty good shot of having the margin actually increase a little bit maybe 1, 2, 3 basis points in the coming quarter. I would say my personal opinion after studying all this and looking at it over the last few days is that, we are more likely to have margin go up in Q3, 1, 2, or 3 basis points from the Q2 margin level than we are likely to have it go down a little bit. But we think we are still right on track for our guidance for the year.

Bold Color on New Loans

Michael Rose – Raymond James: Just wanted to get a little context on Matt’s question on the margin, when you laid out your initial guidance of 5.80% to 6.05%, did that kind of incorporate the tenure where it is, and I wanted to get some color around where you’re booking new loans at and the competition is starting to pick up a little bit?

George Gleason – Chairman and CEO: Yes. It did contemplate that we would be in a very low rate environment and we didn’t give guidance of 5.80% to 6.05%. We gave guidance of 6.05% to 5.80% and the order in which we gave that was intended to communicate that we expect that we would move over the course of the year towards that 5.80% level by the end of the year. So, the order in which we gave that was intended to be indicative of the trend that we thought we would see. The loans that we are booking we’re getting, what I think are very good yields on it. Certainly, it is a very competitive environment and we’re having to get very competitive on certain pieces of business, but none of the competition we are experiencing is inconsistent with our expectations when we gave our guidance. We have a philosophy here that we are not going to work for free, and we are not going to book assets that have such low yields that we don’t get an appropriate risk adjusted return for our shareholders consistent with a high teens to low 20s ROE. So, we are very disciplined about that and we’re continuing to hang on to that discipline. We could have had much more loan growth in the quarter just ended in the first six months of this year, had we not been as disciplined as we are being on credit quality first and pricing second and we could be a much bigger bank than we are and just have average results. But for our bank, for our staff and this is a goal that our staff shares as to not be good, we don’t even want to be great. We want to be excellent and if you’re going to be excellent you’ve got to maintain your discipline on credit quality and you’ve got to maintain your discipline on pricing and keep those margins there. So, I think we are getting far better yields on average than most banks are getting out there and I think we are getting appropriate risk-adjusted returns for the credit risk that we are taking which I think are very minimal credit risk, but I still think we are getting very good risk-adjusted returns on the loans for bookings. So, we feel good about that and nothing is really much different than what we expected at the beginning of the year.

Michael Rose – Raymond James: Just as a follow-up if I can on the liability side more specifically on the deposit complexion it seems like you do have some room to continue to shift mix and lower your funding cost maybe for another couple of quarters, but with the loan to deposit ratio here at about 96% I mean how should we think about deposit growth and the impact that could have on the margin in future quarters?

George Gleason – Chairman and CEO: As I said in my prepared remarks. I think we’ve got some further improvement to come over the next quarter or two in our average cost of interest bearing deposits which is 0.39% for Q2, but we think those levels in improvement I think that improved 9 basis points when drag in the quarter just ended and we think further improvements will be more modest less than 9 basis points a quarter because we are becoming a little bit more offensive minded because that growth is beginning to land on our balance sheet and fairly significant volume and I have got to grow my deposits from those loans. I still think we do that with some downward movement in our cost of interest-bearing deposits over the next couple of quarters. So I think we still got some room to go there but that will – that rate of descent will slow in this quarter and probably the next quarter because we will be putting a little more focus on offense and growing that deposit book to fund this volume of loans that we’ve already funded that we expect to fund this quarter and that are sitting in unfunded balances that will fund over the next couple of years.

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