Susan Blair - EVP of IR George Gleason - Chairman and CEO.

Kevin Reynolds - Wunderlich Securities Michael Rose - Raymond James Jennifer Demba - SunTrust Robinson Peyton Green - Sterne, Agee Blair Brantley - BB&T Capital Markets Brian Martin - FIG Partners Stanley Westhoff - Walthausen & Company David Bishop - Drexel Hamilton Brian Zabora - KBW.

Welcome to the Third Quarter 2014 Bank of the Ozarks Incorporated Earnings Conference Call. My name is Jeanette and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Susan Blair. Ms. Blair, you may begin..

Good morning. I am Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company’s results for the quarter just ended and our outlook for upcoming quarters.

Our goal is to make this call as useful as possible in understanding our recent operating results and outlook for the future.

To that end, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic, real estate market, competitive, credit market and interest rate conditions, revenue growth, net income and earnings per share, net interest margin, net interest income, non-interest income including service charge income, mortgage lending income, trust income, net FDIC loss share accretion income and amortization expense, other income from loss share and purchased non-covered loans, and gains on sales of foreclosed assets including foreclosed assets covered by FDIC loss share agreements, non-interest expense, our efficiency ratio, asset quality and our various asset quality ratios, our expectations for net charge-offs and our net charge-off ratios, our allowance for loan and lease losses; loans, lease, and deposit growth, including growth in our non-purchase loan and lease portfolio; growth from unfunded closed loans; and growth in earning assets, changes in expected cash flows of our covered loan portfolio; changes in the value and volume of our securities portfolio; conversion of our core banking software, the opening, relocating and closing of banking offices; our expectations regarding recent mergers and acquisitions and our goals for additional mergers and acquisitions in the future; and changes in growth in our staff.

You should understand that our actual results may differ materially from those projected in the forward-looking statements, due to a number of risks and uncertainties, some of which we will point out during the course of this call.

For a list of certain risks associated with our business, you should also refer to the Forward-Looking Information section of our periodic public reports, the forward-looking statements caption of our most recent earnings release, and the description of certain risk factors contained in our most recent Annual Report on Form 10-K all as filed with the SEC.

Forward-looking statements made by the company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance.

The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings press release. (Technical Difficulty).

Good morning and thank you for joining today’s call. We are very pleased to report our excellent third quarter results.

Highlights of the quarter included record organic loan and lease growth, record growth in our unfunded balance of closed loans, record net interest income, record service charge income, record trust income, and excellent asset quality.

In addition to posting stellar financial results for the quarter, we accomplished many other tasks in the quarter just ended, including the completion of our legacy bank core system's conversion project, completion of our annual joint regulatory exams for safety and soundness information system and trust, completion of our annual FDIC loss share audit, and the completion of a selection and contract negotiation process for a new document loan system, and a new consumer loan automated underwriting system.

Not letting up on the pace of progress over the first weekend of October, we completed the core system conversion project for our Bancshares acquisition. It's been a very busy last few months, and we've a lot to talk about, so let's look at the details.

Net interest income is traditionally our largest source of revenue and is a function of both volume of average earnings assets and net interest margin. Of course, loans and leases comprise the majority of our earning assets.

In the quarter just ended, our non-purchased loans and leases, which excludes covered loans and purchased non-covered loans grew a record $468 million. This follows record growth of $393 million in this year's second quarter.

During the first nine months of this year, our non-purchased loans and leases have grown $1.01 billion, well above the latest upwardly revised minimum growth guidance for the full year. Perhaps more impressively, our unfunded balance of closed loans increased a record $751 million during the quarter just ended and now totals $2.58 billion.

During the first nine months of this year, our unfunded balance of closed loans has more than doubled increasing $1.37 billion during that nine-month period. While some portion of this unfunded balance will not ultimately be advanced, we expect the vast majority will be advanced.

This has favorable implications for future growth and loans and leases for the remainder of this year and in 2015. We are consistently and constantly striving to enhance our capabilities to produce increasing volumes of good quality, good yielding earning assets.

As a result, we believe we're strategically positioned for even stronger growth and earning assets in the years to come. In previous conference calls, we've discussed our five engines for growth and earning assets apart from acquisitions.

The strongest of these five organic growth engines is Real Estate Specialties Group, which has contributed to majority of our organic growth in recent years and did so again in the quarter just ended. This unit is well known from our numerous discussions in previous calls and presentations.

We believe Real Estate Specialties Group will continue to be our strongest engine for organic growth and earning assets for some time to come. With that said, we continue to believe that our other organic growth engines will contribute more to growth and earning assets in future years than in recent years.

These other growth engines include our vast network of community banking offices in seven states, our leasing division, our relatively new Corporate Loan Specialties Group, and our investment securities portfolio.

With the exception of our investment securities portfolio, each of these other organic growth engines made positive contributions to our growth and earning assets in each of the first three quarters of this year.

We seem to be hitting on all cylinders, and our third quarter results actually show an acceleration of our loan and lease growth for community banking and leasing. A great deal of work has gone into building the talent and the infrastructure needed to make all five of our organic growth engines effective.

The geographic and political diversity -- product diversity of our different growth engines are significant factors in our optimism regarding our ability to achieve increasing levels of growth in earning assets in 2015 and beyond. We have exceeded our original and revised guidance for non-purchased loan and lease growth for 2014.

We expect another good quarter of non-purchased loan and lease growth in the fourth quarter providing a solid finish to 2014. In 2015, our goal is to achieve growth in non-purchased loans and leases exceeding our 2014 growth. Obviously that is a much bigger number than we've previously discussed.

Given our current momentum, including our substantial unfunded balance of loans already closed, we believe that is a reasonable goal. While we were very pleased with our growth, we are even more pleased with the credit and interest rate risk profile of the loans and leases we have booked.

We've been operating in an intensely competitive environment in which some competitors have been in our judgment taking on excessive credit and excessive interest rate risk to generate volume. In contrast, we believe our lending teams have been maintaining sound pricing and credit discipline.

During the quarter just ended, we obtained large amounts of cash equity in most new loans, continued to require appropriate risk adjusted pricing, and actually increased our percentage of variable rate loans, which now comprise of 69.9% of total non-purchased loans and leases.

That's up from 68.5% at June 30 of this year, and 62.7% at December 31 of 2013. As you can see from the decline in our net interest margin, we are not totally immune to the effects of this very competitive pricing environment, but our team seems to be doing relatively well.

It takes hard work and great discipline to achieve our loan and lease growth while adhering to stringent credit risk and interest rate risk standards, but we believe our discipline will distinguish us in a very positive way in the future from banks, which may have disregarded conservative credit and interest rate risk standards in order to achieve growth.

In regard to net interest margin, our third quarter net interest margin on a fully taxable equivalent basis was 5.49%.

In our recent conference calls, we provided guidance that we expect our 2014 net interest margin to decline, but the year-over-year decline from 2013 to 2014 was expected to be less than the 28 basis points of decline in net interest margin from 2012 to 2013.

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

Given the continued decreases expected in our balances of high yielding covered loans and considering the very low rate ultra competitive environment in which we are operating, we expect another year of declining net interest margin in 2015.

At this point, we expect that 2015 decline in net interest margin to be somewhat similar to the declines in net interest margin we experienced in 2013 and are currently experiencing in 2014.

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

During the third quarter we accelerated our spin-up deposit gathering campaign with 25 of our 165 offices now in spin-up mode because of the excellent loan and lease growth achieved in the quarter just ended and our increased expectations for loan and lease growth in the quarters ahead for the remainder of this year and the full year of 2015, we now expect that we will need to achieve greater deposit growth in coming quarters than we had previously modeled.

This increased growth is very positive for us, but it will also mean somewhat higher cost of interest bearing deposits. Over the next five quarters, we expect cost of interest bearing deposits will increase each quarter by somewhere between one and five basis points per quarter.

Of course that expectation is factored into our previously mentioned net interest margin guidance. Our net interest margin guidance does not take into account the effect of any future acquisitions. Let’s shift to non-interest income. Income from deposit account service charges is traditionally our largest source of non-interest income.

Service charge income for the quarter just ended was a record $7.36 million and increased 26.5% compared to the third quarter of 2013.

Of course, acquisitions have been significant contributors to this growth, but even excluding acquired deposits, we've continued to grow core deposit customers in the first nine months of this year adding approximately 7,022 net new checking accounts so far in 2014 and again that number excludes deposits acquired in acquisitions.

Clearly our good growth momentum has not been limited to loan and leases. Mortgage lending income for the quarter just ended increased 35.4% compared to the third quarter of 2013, but for the first nine months of 2014 mortgage lending income has decreased 18.3% compared to the first nine months of 2013.

After a slow start in the first quarter of this year, we are pleased to see an improving trend in mortgage lending income over the last two quarters. Trust income for the quarter just ended was a record $1.42 million and increased 33.9% compared to the third quarter of 2013 and 4% compared to this year's second quarter.

Our trust business grew substantially with the July 2013 FNB Shelby acquisition and we've continued to achieve organic growth. The recent Summit acquisition included a small book of trust business, which has contributed modestly to trust income in recent months.

Net gains from sales by other assets were $1.69 million in the quarter just ended, compared to $2.50 million in the third quarter of 2013 and $1.45 million in the second quarter of this year. In recent years, such net gains have been a meaningful contributor in every quarter.

We expect that net gains will continue to be a significant income item for quarters to come, but by its nature, this category will tend to vary quite a bit from quarter-to-quarter.

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

As part of our FDIC assisted acquisitions, we record a receivable from the FDIC based on expected future loss share payments and we record a callback payable to the FDIC based on estimated sums we expect to owe the FDIC at the end of the loss share periods.

The FDIC loss share receivable and the related callback payable are discounted to net present values and such net discounts or accreted into income over the relevant time periods.

In the most recent two quarters, this category has flipped to net amortization expense being a net amortization expense of $0.56 million in the quarter just ended, compared to net accretion income of $1.40 million in the third quarter of 2013 and net amortization expense of $0.74 million in this year's second quarter.

This change reflects the continued evolution of a phenomena we have discussed at length in recent calls as we have more experience with our portfolios of covered loans and as these portfolios become more seasoned, we are increasingly revising upward the projected cash flows on certain loans where we originally expected an elevated risk of loss, but no longer believe that such loans have an elevated risk of loss.

These are loans where principal reductions through amortization, unscheduled principal payments, provision of additional collateral, improvement in the obligor's financial condition and/or other factors have in our view largely eliminated any elevated risk of loss.

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

This is the reasons that our net accretion income of our FDIC loss share receivable declined in prior quarters and the reason it has changed to net -- from net accretion income to net amortization expense in the two most recent quarters.

This is also the primary factor in the increase in the yield on covered loans from 9.49% in the third quarter of last year to 16.28% in the quarter just ended.

Based on the improving risk profile and greater seasoning of many of our covered loans, we expect to identify additional loans in the current quarter and future quarters, for which it will be appropriate to upwardly revise our estimated of future cash flows.

The net effect of this will be positive for net income, since we will have an additional $1.25 of interest income for every $1 of reduced non-interest income related to amortization of the FDIC loss share receivable.

In addition, non-interest income in the quarter just ended included other income from loss share and purchased non-covered loans of $3.37 million, compared to $2.48 million in the third quarter of 2013 and $3.63 million in second quarter of 2014.

This line item includes certain miscellaneous debits and credits related to the accounting for loss share and purchased non-covered loans, but it consists primarily of income recognized when we collected more money from covered loans and purchased non-covered loans than we expected we would collect.

We refer to these additional sums collected as recovery income.

It is unlikely -- it is likely, I am sorry, excuse me, it is likely that this will continue to be a meaningful income item for many quarters to come because it can be significantly impacted by loan prepayments, other income from loss share and purchased non-covered loans will vary from quarter to quarter.

The significant income we continue to recognize in this category and large part is a result of the skills, the hard work and the achievements of the team we have developed to resolve and collect problem assets. Let's turn to non-interest expense.

Our efficiency rate show for the first quarter just ended was 43.9% compared 43.0% for the third quarter of 2013 and 44.6% for this year's second quarter.

While our efficiency ratio will vary from quarter to quarter especially in quarters such as the quarter just ended where we had significant unusual items of income and non-interest expense, we expect to see generally improving trend in our efficiency ratio in the coming years.

Our expectation for improvement in our efficiency ratio is predicated on a number of factors including our expectation that we will ultimately utilize a large amount of the current excess capacity inherent in our existing branch network.

Our expectation that are ongoing core system conversion projects will reduce software cost by approximately $2.75 million per year starting in 2015 while providing at the same time greater functionality for our customers and employees in creating other opportunities for enhanced operational efficiency and our expectation for achieving additional cost savings from our recent acquisitions.

Our guidance regarding improving efficiency ratio does not consider the potential impact of any future acquisitions. Our results for the quarter and nine months just ended were above significantly impacted by unusual items and non-interest expense.

During the quarter just ended we incurred software and other contract termination charges of $0.5 million. Acquisition related and system conversation expenses of approximately $2.2 million and fraud losses of approximately $0.6 million attributable to the Home Depot systems breach.

During the first nine months of this year we've incurred software and other contract termination charges of $5.6 million, acquisition related and system conversation related expenses of approximately $3.7 million and of course the $0.6 million of fraud losses attributable to the Home Depot systems breach.

By comparison in both the third quarter and first nine months of 2013, we incurred approximately $1.4 million of acquisition related expenses. We've incurred significant unusual items of non-interest expense in each quarter of 2014 including the total $3.3 million in the quarter just ended.

The unusual items of non-interest expense incurred so far this year relate primarily to our bank shares and summed acquisitions in the first and second quarters and our significant core software conversion projects and related contract termination charges.

We will incur addition unusual items of non-interest expense in future quarters related to core software system conversions and recent and future acquisitions.

Specifically in the fourth quarter of 2014, we expect to incur cost related to our bank share's core system conversion, which again we completed over the first weekend in October and our Summit core system conversion, which we plan to complete in the second weekend in November.

We also expect to incur certain charges related to closing eight overlapping Summit and legacy branches in November.

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

In the second quarter of 2015, we expect to incur cost related to the core system conversion of Intervest.

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

One of our longstanding and key goals is to maintain good asset quality. Economic conditions in recent years have made our traditional strong focus on credit quality even more important. The strength of our credit culture and the depth of our commitment to asset quality are both evident in our key asset quality ratios in the quarter just ended.

At September 30, our ratio of nonperforming, non-purchased loans and leases as a percent of total non-purchased loans and leases was 49 basis points compared to 41 basis points at September 30, 2013 and 58 basis points at June 30th this year.

Similarly, excluding covered loans purchase, non-covered loans and foreclosed assets covered by loss share, nonperforming assets as a percent of total assets were 50 basis points at September 30 of this year compared to 40 basis points at September 30 of last year and 62 basis points at June 30 of this year.

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

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

For the first nine months of this year, our annualized net charge-off ratio for non-purchased loans and leases decreased to 10 basis points compared to 13 basis points in the first nine months of 2013. Let me close our prepared remarks with a few comments about growth and acquisitions.

Organic growth and loans, leases and deposits continues to be our top growth priority and we’ve clearly demonstrated I believe our ability to achieve substantial growth apart from acquisitions.

With that said, M&A activity continues to be another significant focus as we believe that M&A provides meaningful opportunities to augment our healthy organic growth. We are very pleased with the progress of each of our acquisitions including our two acquisitions in the first half of this year.

We continue to be active in identifying and analyzing M&A opportunities and we believe an active and disciplined M&A strategy will allow us to continue to create significant additional shareholder value.

This potential is evident in our pending Intervest acquisition, which is expected to be nicely upgraded to our book value per common share, tangible book value for common share and diluted earnings per common share in 2013. That concludes our prepared remarks. At this time, we will entertain questions.

Let me ask our operator to once again remind our listeners how to queue in for questions, operator?.

Thank you, we will now begin the question-and-answer session. (Operator Instructions) And we have a question from of Kevin Reynolds of Wunderlich Securities. Please go ahead..

Thank you.

Good morning George, how’re you doing?.

Doing fine. Thank you. Good morning, Kevin..

Very good quarter, and I guess I have a couple of questions. One is, with what we have seen in the marketplace recently, sort of fears of a global slowdown out there and we saw the 10-year drop pretty sharply this morning.

Do you get the sense as you look across your lending opportunities out there, the markets where your lenders are actually very actively engaged, is there any domestic slowdown that is going on right now that you can see, or anything that would be out of the ordinary that might be reflective of what is going on in the marketplace? And then, a second question for you on M&A.

You talked about needing to ramp up deposit growth to match the loan growth that you have seen and how that would have a little bit of a negative impact on deposit cost for the next few quarters.

Is there a thought that the nature of acquisitions, if you start to target -- as you look out there, might change once you go from buying markets -- expanding into markets as opposed to -- or might you consider a deposit-rich acquisition to provide that funding base as a little bit of a different focus? So I will stop there.

I'm not sure if that was a clear question or not..

No, I understand exactly your question. The first question that you asked about have we seen an economic slowdown. Really, we have not. Economic conditions continue to be improving. It seems like in most of our markets, we are still not in a robust recovery by any means, but we’re seeing generally more positive trends pretty much across the footprint.

There are few areas where they’ve lost employment and lost a major employer or something where recovery seems to have stagnated.

But by and large, I think we’re seeing generally improving trend, so these fears about Europe or slowing growth in China and coming back in and really affecting our domestic growth, we’ve not seen that impact our markets by and large at this point in time.

The second question you asked, would we look at more deposit generating franchises and acquisitions as opposed to asset generating franchises, and really if you look at our live bank acquisitions, we’ve done a mixture of both.

The Geneva, Alabama acquisition and the FNB Shelby acquisitions are both acquisitions that are 100 plus -- 139-year-old deposit bases, very, very strong deposit oriented franchise that the ability to generate good quality, good yielding loans in those markets on average is probably going to get you to a 50% loan to deposit ratio on average between those two acquisitions.

So, those were very much transactions where we bought extremely valuable old vintage deposit bases at very advantageous prices.

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

The Summit acquisition had some markets that were asset generating markets and some markets that were deposit generating. So we’re looking across a broad spectrum of acquisitions. We would buy additional asset generators if we could get them on terms that were accretive to our shareholders and positive, we would buy additional deposit base generators.

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

But as I've talked about for a couple of years now, we have this tremendous growth potential for deposits inherent within our existing branch network. We have a good strategy that I believe is a very economical and efficient strategy for harvesting that potential which we refer to as our spend-up strategy.

And we think we've got capabilities to grow deposit for several years into the future with our existing branch network without needing to specifically target acquisitions that are deposit-rich in their nature.

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

All right. Thanks a lot, George. Good quarter..

Thank you..

And we have the question from Michael Rose of Raymond James. Please go ahead..

Good morning, Michael..

Hi, good morning. How are you, George..

Doing great..

Just if we could start on the growth in unfunded commitments. Obviously, a record for you guys this quarter.

Where is it really coming from? I know it is mostly real estate, or it is real estate specialties group, but is it -- are you approving more transactions? Are the transactions that you are seeing, are they getting better? Is it the expansion of some of the new offices? Can you just give us some context on where the growth in unfunded balances is coming, and then what your expectation might be for further acceleration from here?.

The volume of transactions we're looking at has increased significantly. There seems to be a lot of good opportunities out there. That is in part just a result of us continuing to grow our customer base and offices like Dallas and Austin and Atlanta where we've been for a while.

It's also a result of the fact that we've got new offices opened in the last 16, 17, 18 months in New York, and then Huston and then Los Angeles. So we are seeing a lot more transactions. Our approval and closing percentage is still running somewhere in that 6% to 8%, sub-10% of all the transactions we're looking at.

We're continuing to be very particular and very targeted in what we are doing. But we've got -- we've closed loans now in 40 states through Real Estate Specialties Group over the last 11 years. So it's very much a national franchise.

Certainly the growth potential of it is helped by the new offices in L.A., in New York, in Houston where we're having the opportunity to interact with more potential customers than we did in the past. We got more boots on the ground and that's creating some additional opportunity, so all that I think is very positive.

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

And Real Estate Specialties Group was accounted for $309 million of our Q2 growth and $303 million of our Q3 growth unfunded. Corporate Loan Specialties Group which accounted for $22 million of our growth in 2Q accounted for $19 million in Q3.

Community banking really called traction and after accounting for $55 million of our growth in Q2 accounted for $135 million in Q3. And leasing which was $6 million of our growth in Q2 was $10 million of our growth in Q3.

So it was kind of broad based and reflects our view that with our customer base in most of our markets the economy is still getting slowly better.

Now the rest of your question is do we expect to see further acceleration? I'd tell you our pipeline today of deals we're working on looks about the same as the pipeline of opportunities we were looking at when we had our April call and our July call. So we've certainly not seen a deceleration in opportunities and it's at a pretty brisk level.

I don't know that the pipeline -- I wouldn't say it's better today than it was when we last talked in July or when we talked in April, but it is pretty much on par with the pipelines we were working on then. So, I don't know if that accelerates or not, but we're in a good place in any event..

Okay. That's helpful. And then as a follow-up, this question probably hasn't been asked in a while, but, you know, as I look at your capital levels and obviously don't have the period and numbers, you didn't provide them.

But with Larry in Intervest how should we think about capital levels as we move forward? Would you consider raising either common or preferred or some other instruments? What are your thoughts there? Thanks..

Well, you know, bear in mind it wouldn't, but four or five -- three or four quarters ago that I was getting the questions that you got all this excess capital, should you buyback stock or do a special dividend or what are you going to do to put this capital to work.

And you'll recall then that we said we believe that through a combination of things, primarily organic growth in our loans and leases, we'll be able to utilize all of our surplus capital over time. We still have an abundant -- abundance of surplice capital. And obviously the Intervest transaction is all for stock.

So if that's not going to really use up any capital in that transaction so we're still looking at it as a significant surplus of capital, although obviously the growth we've generated, particularly in the last two quarters, is getting that capital ratio down to more appropriate level. We still got ways to go there.

But the trend suggest that we will deploy that excess capital in time and what I believe is going to be very accretive manner, primarily in high quality loans and leases..

Great. Thanks for taking my questions..

All right. Thank you..

And our next question comes from Jennifer Demba of SunTrust Robinson. Please go ahead..

Thank you. Good morning..

Good morning, Jennifer..

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

The $10 billion threshold is a meaningful number. But one doesn't want to let the tail wag the dog and really the $10 billion is a tail and the dog is our realizing and achieving our potential as a company. So, we've got tremendous momentum and we have no intent or expectation of slowing that down regarding the $10 billion threshold.

Now in a perfect world, we would at $9.5 billion, find a $3 billion or $5 billion acquisition or $2 billion acquisition and bop over the $10 billion threshold in a nice meaningful way.

That may happen, that may not happen, but with the balance sheet that we've got at September 30 and the Intervest acquisition expected to close probably, I don't think we get that closed in Q4, but I think we would probably get it closed in the first half of Q1 of next year and pro forma basis, we would expect to be $8 million plus or minus and probably plus then if we have a good quarter of growth in Q4.

So it's very possible with the growth numbers that we're achieving that we could reach the $10 million threshold without additional acquisitions by the end of next year.

It could be into 2016, but we seem well on track to do that and we're not going to slow down or alter a fundamentally sound business strategy because of the short term precautions of crossing that $10 million threshold.

That would be silly to take the momentum we've got and mute that or diminish that by saying, well we're going to get to $10 million and we only going to cross it in a meaningful way. We're going to cross it, how do we cross it and we'll -- if we make a nice acquisition that bumps us nicely over that would be really nice.

If it's a good deal, if it's not a good deal, we would be stupid to do an acquisition just to jump over $10 million. So we're going to run our company and the impact of crossing the $10 million is a secondary consideration. We will consider it.

We are considering it, but we're going to run the company for maximum effect and we're thinking longer term, not what got us once again to do earnings for one or two quarters because we crossed in [$1 billion] (ph).

I am thinking about where we're going to be in two years, five years, seven years and 15 years as a company and those much longer term much more fundamentally important considerations will rule that decision. With that said, yes, we will lose some revenue when we cross $10 million as a result of the Durbin amendment.

We are already -- we've already done for three straight years. We've done the capital and liquidity stress test as if we were a big bank. We continue to augment what we are doing there. We know that our consumer compliant requirements will continue to escalate.

That's been a very evolving target for the industry for several years now as the regulatory focus has shifted more and more on that. So we've already probably doubled our staff in that regard and compliance and internal audit and so forth in recent years and probably are adding -- well we're adding more people this year and next year.

In that regard, we realize we'll have to continue to ramp up what we're going. Our fair lending CRA, those sort of compliance issues are getting more and more attention in our company because we know the standards get higher. As you get bigger, the room for error gets smaller. So we're already doing all that and we'll continue to do that.

I think we'll be ready for the increased rigor of crossing that threshold when we do so. We'll cross it however we cross it and it will just depend on how acquisition opportunities integrate with our organic growth..

Thank you, George..

Okay. Thank you..

And we have a question from Peyton Green Sterne, Agee. Please go ahead..

Yes George, just a question in terms of thinking about the longer term perspective of how you managed capital. Certainly I know you’ve operated over the last several years with excess capital and now you seem to be deploying it very rapidly through organic growth.

And I guess with the regulatory backdrop that exists, not necessarily in relation to Ozarks specifically, but more generally where do you feel like the right cushion is for total risk-based capital or -- and then secondarily, if you could remind me about where you're willing to go on a tangible common equity ratio basis?.

Well the -- Greg, the regulatory standard for total risk base is 10.5%, yes the regulatory standard for total risk base is 10.5%. I think our internal guideline is 12% and of course there is no regulatory standard for tangible common equity, but I think we have an internal standard of 8.5% in policy now.

And we've increased that standard from -- it used to be six to 7.5% and then it became 7.5% and then it became 8, then it became 8.5% because obviously the basal three and other regulatory guidelines on capital are pointing to higher capital level.

So we've established internal guidelines for all of the metrics and I can tell you, the 8.5% tangible common equity ratio, I can tell you, the 12% total risk base, I can't tell you any of the others, but I can tell you they are all 100 to 150 basis points higher than the regulatory standards to be well capitalized.

So we intend to operate with more capital than the industry guidelines, the regulatory guidelines required and we think that's prudent because of two reasons.

We just think it's nice to have some extra capital and also we think we're going to see a situation and I don't know whether it's three years, five years, seven years from now, where there are going to be incredible opportunities because we think a lot of buying we're taking on a ton of credit risk and a ton of interest rate risk and that's going to have some harmful re-precautions on some of those buying at some point in time.

And it's going to create some tremendous opportunities in the future and we want to have some excess room to be in a strategic position to take advantage of that when those opportunities arise if they do as we think arise..

Okay. And then as a follow-up, I could very well be thinking about this the wrong way, so please correct me if I am, but in the period closed but not yet funded loan commitment number of jumps about 2.6 million up and about $1.2 million at the end of the year.

I guess if I took that $1.4 million change and added that to your total assets to come up with an adjusted tangible equity ratio is all as you are going to finally put you a shade under 9% on kind of an adjusted basis, am I thinking about that right and that they're all fine or would you expect to start seeing more payouts on prior periods may be mute the total loan growth going forward?.

Well it's a lot more complicated then yes or no. So, will they all fund no. Will the vast majority of them fund? Yes, I think the vast majority of them will fund. Will they all fund? Well whatever amount is going to fund, fund tomorrow, so that I've got a static balance sheet no. They won't.

They're going to fund and we generated $32 million in revenue income in the quarter just ended. Obviously we're not going to be content to just tell you that level of income generation. So we expect the capital formation to be ongoing as those loans fund and obviously we're in the construction and development loan business.

So we're going to have lots of payoffs every quarter. So I fund $500 million of those loans in a quarter and have $300 million of payoffs then you not only got $200 million of growth from that book or if I fund $700 million and have $300, I got $400 million of growth.

So it's a dynamic -- there are multiple variables going on here and capital formation is one of those variables. The amount of those unfunded loans that we'll close is one variable.

The amount of pay-downs that come out of the back side of the portfolio is another variable and we're modeling, managing, projecting all that constantly and we feel very good about where we are in that whole process..

Okay.

And then is there -- in terms of the $750 million and commitment growth linked quarter, is there a right duration to think about in terms of when those loans will fund? Is there anything different about the mix this quarter compared to prior quarters that would make them slower in funding or faster to fund?.

Probably not really. I would have to go look and take our prior quarter's projection to funding on all those loans and sum them up and take the loans we funded in this quarter. To answer that, I don't think there is a material difference in the speed, the velocity of those things funding.

I don't think there is a material difference in the velocity of the projects that we're funding, stabilizing and then refinancing out at much lower rates and much higher leverage.

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

We’re on a gigantic hamster wheel of loan origination. You’ve got to be running all the time because there is a constant wave of payoffs coming from the good work you did a year ago or two years ago or 30 months ago.

Those loans are going to stabilize and pay-off and you got to have new business, new customers to keep the growth going when you’re facing a constant onslaught of payoffs. Every loan portfolio experiences that, whether it’s consumer or residential or whatever.

It's just -- a it's a faster velocity of fundings and payoffs in a construction and development portfolio because the life of it tends to be short..

Okay, great. Thank you for taking my questions and answering them..

All right, thank you..

And we have a question from Blair Brantley of BB&T Capital. Please go ahead..

Good morning, George..

Hi, good morning, Blair..

A couple of questions.

Regarding paydowns on the covered loans and purchased loans, anything out of the ordinary there that you are seeing or maybe what your expectations are there?.

You know that the paydowns I believe on the covered loans actually diminished a little bit in the quarter just ended, just very slightly compared to 2Q.

I would expect -- I could be wrong, but I would expect that will be a continuing trend because we’re getting down to the point in those portfolios where they’re getting a lot better and the component of those portfolios, that’s residential one to four as opposed non-residential is that percentage of resi one to four is increasing in those portfolios.

So those tend to be longer duration assets. If we’re working less problems and we got higher quality in the portfolio then there is less loans that we’re trying to work out of the portfolio. We’re trying to retain the good stuff in there. So I think the velocity of paydowns slows, but not tremendously.

If you look at our slideshow that’s on our Investor Relations part of our website, there is a slide in the slide deck there that shows the paydowns of that portfolio and you can plug into that slide.

The current quarter’s paydowns, most recent quarter’s paydowns and that portfolio has been running all over the last four and half years in a surprisingly linear fashion.

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

Okay.

And then on the purchased non-covered?.

The purchased and non-covered, those loans will probably -- the trend you saw in the last quarter is probably indicative of what I would expect to see out of that portfolio and those are healthy loans.

The customers have lots of options, a lot of those loans we’re -- as they come up from maturity we’re re-documenting them and reclosing them as originated loans and other than purchased loans. So there was probably, I don’t know, 20-30.

I would think it wouldn’t be any more than 40 million of loans in the last quarter that rolled from -- in some form fashion got modified and restructured and moved from the purchase book into our legacy book.

If there are documentation issues or structural issues we want to address on those loans, they may be good quality, but they may need a little work on the way they're restructured, papered out, put together. We’re fixing those and repapering those as new loans as we go. That helps us in a couple of respects.

One, if I move them over to the legacy portfolio if they meet our standards, we’re moving them over, we are not moving problem loans over, but if they meet our standards and need to be repapered for some reason or another, we’re doing that so we can fix the issues, but it also lets us get them into purchase loan there where we can actually create an allowance for loan and lease losses for them and account for them that way..

Okay.

And then, any change in the size of credits or anything in the funded and unfunded balances this quarter?.

I’m sure there is, Blair, but I don’t know what it is. I have not done the math on that and done that level of analysis. I don’t think there is a material difference, but again I've not broken that down and looked at the data at that level yet..

Okay, thank you very much..

Thank you, appreciate it..

And we have a question from Brian Martin of FIG Partners. Please go ahead..

Hi George..

Good morning, Brian..

Just one question on -- back to that Durbin amendment, the impact you guys would feel when you do cross the $10 billion level.

Do you have what that number would be or kind of an estimate of what your implication is?.

No, I don’t. We probably ought to stop and take a look at it, but one of things that I do spend a lot of time, I try to spend all my time focused on things that I can influence or control and I don’t spend any time focused on things that I can’t influence, but I will ask Greg to take a look at that and do a calculation on that.

I have no control over it. I can do all of analysis in the world on that and I can’t influence what that number is going to be. So I’m focusing my time and attention on things that I can make a difference on. But we’ll try to get that number and have that for you on the next call. By the time we have the January call, we’ll try to have that for you..

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

Yeah, we’ve got 25 offices in spin-up mode currently. I don’t have an expectation that we’re going to increase that number. We put the Metro Dallas area offices in spin-up mode. That’s about I guess 10 offices or so late in the third quarter.

So we’re in a position now where we’re generating deposit growth from our spin-up offices in excess of $20 million a week. And if you add that to the organic growth in the other 134 offices, I guess it is that where we take deposits. The organic growth from those plus the spin-up looks quite adequate to meet our needs going forward.

If you look at our balance sheet at 9/30, you might have noticed that we had some short-term overnight borrowings. Greg, what was it, $70 million, $50 million, $75 million something like that, somewhere in that $70 million range more or less. But we’ve already taken care of all of that with deposit growth.

This quarter we’re back in a net cash position as of today with some surplus cash, so we’re managing that deposit growth to just fund what we need to do. I’m not going to spin-up offices and create a lot of cash.

I could, I get another dozen offices and have a lot of surplus cash, but that wouldn’t be cost effective, wouldn’t be helpful to our EPS numbers.

For me to do that, I need to spend these in the right order just as I need them getting the deposits we need at the lowest possible marginal cost of deposit and while doing so, in the context of a three month, six month, 12 month, 24 month, 36 month, 48 month plan of how you spin offices up and then take them back down, so as to maximize your return over an extended period of time and all that’s built into our thinking about what we’re trying to do there.

So we think we’ve got plenty of deposit capacity to do what we need to do..

Okay.

And then, lastly, maybe just with this most recent transaction on Intervest, is there any further change to the tax rate as you look forward?.

Yeah. It's going to probably -- we haven't really done any numbers on that, but just intuitively they have no tax exempt assets at Intervest.

So we're going to be adding that portfolio at pretty much full marginal tax rate on that, yeah, including the fact that we're part of that operations in New York, so on a state tax basis that tends to be a little expensive.

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

Okay. Okay, thanks for the time..

All right. Thank you..

And we have a question from Stanley Westhoff of Walthausen & Company. Please go ahead..

Good morning, George..

Good morning..

I just have a couple of quick questions.

In regards to the unfunded loan portfolio, how much is that related to utilize or unutilized I should say credit lines? Is that included in that?.

They are included in that and unfunded crop loans and unfunded home equity lines of credit are included in that but they are -- all of that is probably single-digit percentage of that total. Everything in there that is -- that's not construction and development loans is probably less than 10% of that total.

So it is mostly unfunded balances on construction and development loans. On our C&D loans we in 99% plus of the cases get all the equity and all the main debt and all the sub debt funded before we fund.

And so we'll -- we may close $40 million loan and fund $1,000 on the closing, the customer and subordinated pieces of the capital structure funding, the land purchase and closing cost and so forth.

And they may fund the first month's draw and the second month's draw and the 10th month's draw all the way out and month seven or month 11 or month 13, whatever we start funding our loan and we're the last dollars into the transaction.

So as a result of that we tend to have a big unfunded balance at June 30 and I don't have the September 30 data on this sheet, but on June 30 our typical construction and development loan we were 53% of the capital structure with our loans. So there was 47% equity and subordinated pieces in behind this there.

So with 47% of project to be expensed before you start funding, our funding tends to get usually delayed quite a few months. So that portfolio that unfunded balances the vast majority of it is those unfunded pieces of construction and development loans..

Okay.

And then just a little color on the Home Depot security breach, what sort of that $0.5 million or $0.5 million that are going for?.

It's going for charges that were made on customers' cards the customers are not going to be obligated for because they are unauthorized and we absorb those. That's the standard rule in the card issue world. It's of credit and if it's an unauthorized charge it's on us not Home Depot which -- the laws need to change on that.

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

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

As a result, you know, to enhance your protection from risk you have to sacrifice some elements of customer convenience and we have geared heavily on being convenient to our customers and not putting a customer who is in a foreign country whether depending on their debit card in a difficult situation and relied on a set of protocols and procedures and security mechanisms that we had in place.

They didn't get us the results we wanted in this Home Depot situation because these were much more sophisticated criminals than we've seen in prior breaches. So our processes have changed. I'm not going to discuss those in detail, but we don’t expect to have same sort of issues.

We've also installed a whole bunch of new processes to make sure that the increased safety, security mechanisms we have in place will not adversely affect our customers.

So we've really been hard on work on that in addition to about a thousand other things this last quarter, but I don't think this will be a recurring sort of problem for us going forward..

Okay. Great. That's all I had. Thanks..

Thanks..

And we have a question from David Bishop of Drexel Hamilton. Please go ahead..

Good morning, guys..

Hi..

Good afternoon, George. A quick question on the community banker that seemed rebound nicely this quarter or increased this quarter. Any change in the strategy or the focus in terms of product focus or product emphasis re-shifting of lenders there.

Just curious what drove that increase?.

Well, a part of this is a fact that the Summit acquisition is on there for full quarter and that is a strong community banking franchise.

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

We're getting some good traction there. And then we're just seeing slightly more positive growth from our low share offices in the southeast and so forth, those markets are healing up and getting little better. So it was a broad combination of things.

I think I've told you and I've said publicly several times the Summit franchise was a single growth engine sort of deal. They had, you know, traditional community banking model and they were in some pretty growthy markets but also some less growth oriented markets.

And those guys had developed some pretty good techniques and products and capabilities to get, to maximize the performance of a rural and suburban community bank franchise. I've said clearly they are consumer lending platform and products for better than our consumer lending platform and products so we are going to their platform.

We are going to their products with some very modest tweaks. They have expertise in poultry lending that we didn't have so we are beginning to roll that expertise out, use their key person in that regard as a subject matter expert for our entire company.

They had some expertise in timber, lumber, manufacturing, production capabilities that is expertise we didn't have, so we are using that and we are rolling that out across our footprint because they just have skills that we didn't have in those three areas, consumer, poultry and timber, lumber-type lending. So we are getting some additional product.

Similarly the Omni bank franchise had some significant expertise team of people down there that were really good at 504 and other SBA loans. We did almost on SBA lending before that. We are using their team as subject matter experts to build a broader SBA loan origination footprint across our platform and across our company.

So that platform is going to be viable to us. So there are things that we are doing on a product specific basis to get more traction in our community bank lending platform and again that was $135 million or so of growth in Q3.

Again some part of that was transferred from purchase loans that came up from maturity that we refilled, repapered, but that was probably some, I don't know $20 million to $50 million I would guess $30 million or $40 million probably as that was formed but the rest of is just pure real growth.

So pretty enthused about the traction we're getting on the community banking side of what we're doing. .

Great, thanks George..

Thank you, Dave..

And we have a question from Brian Zabora of KBW. Please go ahead..

Thanks. Hi George..

Hi. Good morning Brian. I guess that is good afternoon to you..

Fairly. That's right. There is a question on the unfunded commitments. Is the rates -- interest rates and floors, is that similar compared to the funded balances that you have, or could we see maybe some decline in the loan yields as you see some of this funding occur..

Brian, I don’t think we've seen a significant shift in pricing on the stuff we're originating really over the last quarter or two to three quarters. I think it is a pretty much we have been in a reasonably stable rate environment.

I know if you try to 10 year you would say there is a lot of volatility, but we don’t try the 10-year, from a loan pricing perspective there has not been much movement in what we have seen. So we didn't get the extra velocity that we've gotten in Q2 or Q3, by saying why we're going to work for less.

That's not how that growth came from, which is probably the thrust of your question. So I don't think it's any different now. Clearly if you look at the difference between our cost of funds and our legacy loan yields, that number has dropped several basis points quarter for several quarters.

I think that trend of some further contraction between legacy loan yields and cost of funds continues for many quarters to come.

Over the next five quarters I would expect that core spread to continue to decrease because frankly the loans were booking today are not quite as good yields as the loans we booked two years ago and it's a just a phenomenon.

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

Great. And then on just variable compensation, how much are your lenders' compensation tied to this loan production, and may again as loans fundings -- fundings pick up, could we see some salary expense increases in the coming quarters..

Well our lenders get a pay-to-base salary and we have not been suicidal in nature. We seize to pay lenders for loan production many, many, many years ago because if you pay guys for production and even if you put a lot of safeguards on there, you're going to get production you don’t want to get.

Even the most well intention lender when his daughter is going to college and the college tuition bill comes and he is going to think I got to generate some volume and I don’t want my guys thinking that way. So what we do is we pay base compensation to our lenders.

We set that based on their proven historical track record of producing volumes of good quality, good yielding loans.

We take into account quality and yield as well as volume when we set their base comp and the guys who do very, very well for us, get doses of stock options and if they really high level guys stock ramp and that’s their incentive compensation. Of course those options and grants vest in three years.

So that provides them the incentive to think long-term not short-term and think well, I want these to be worth more in three years then they are today or in the case of options I want them to be worth something in three years.

So the stock has got to go up and if I make a bunch of bad loans, the stocks is not going to go up and I want to be here in three years to cash in on when they vest and if I make a bunch of bad loans, I won't be here in three years. So that’s the way we do it.

A lot of other banks have -- and we compete with a lot of these guys every day where they pay their guys direct incentives based on production in cash immediately.

They have a call back in a lot of cases where they get them back if bad things happen in the future, but calling back the guys come two years from now because he made bad loan is not a full solution to your problem.

So we try to do things that just avoid in sending people to engage in behavior that could be harmful to us and try them to incent them to engage in a safest possible highest quality behavior..

Thank you for taking my question..

Thank you, Brian. Operator And I am showing no further questions at this time..

All right. There being no further questions, that concludes our call. Thank you guys for joining in. We'll talk with you in about three months. Thank you. Bye, bye..

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..