Susan Blair - EVP of IR George Gleason - Chief Executive Officer Greg McKinney - Chief Financial Officer.

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

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

Miss Blair, you may begin..

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

Our goal is to make this call as useful as possible to you in understanding our recent operating results and outlook for the future. A transcript of today's call, including our prepared remarks and the Q&A will be posted on bankozarks.com under the Investor Relations tab.

During today's call and another disclosures and presentations, 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, bank-owned life insurance income, other income from purchased loans and gains on sales of foreclosed in other assets, non-interest expense, including acquisition related, systems conversion and contract termination expenses, our efficiency ratio, including our ultimate goal for achieving a sub 30% efficiency ratio, asset quality and our various asset quality ratios, our expectations for net charge-offs and our net charge-off ratios, our allowance for loan and lease losses; loans, lease, and deposit growth, including growth in our non-purchased loan and lease portfolio; growth from unfunded closed loans; and growth in earning assets, changes in expected cash flows of our purchased loan portfolio; changes in the value and volume of our securities portfolio; the impact from last year's termination of loss share agreements, conversion of our core banking software and estimated cost savings in connections with such conversions, the opening, relocating and closing of banking offices; our expectations regarding recent mergers and acquisitions and our goals and expectations for additional mergers and acquisitions in the future; the availability of capital, changes in growth in our staff, the eventual impact of the Durbin Amendment on non-interest income and expenses with regard to regulatory compliance including the eventual impact on non-interest expense from total asset exceeding $10 billion.

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.

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

Good morning. We are very pleased to report outstanding third quarter results.

Highlights of the quarter included net income of $46.1 million, diluted earnings per common share of $0.52, record growth in both our funded balance of non-purchase loans and leases, and our unfunded balance of closed loans, some of our best asset quality ratios as a public company and excellent efficiency ratio of 37.6%, and completion of the Bank of the Carolinas acquisition.

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

Net interest income is traditionally our largest source of revenue, and is a function of both the volume of average earning assets and net interest margin. Our third quarter 2015 net interest income was a record $96.4 million.

We continued to enjoy a very positive trend in net interest income in the quarter just ended, as a result of excellent growth in average earning assets, which more than offset the reduction in our net interest margin. Of course, loans and leases comprise the majority of our earning assets.

In the quarter just ended, our non-purchased loans and leases grew a record $680 million. This growth was $213 million more than our previous quarterly growth record achieved in third quarter of 2014.

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

This has favorable implications for future growth in loans and leases. In our previous conference calls this year, we said that one of our goals in 2015 was to achieve growth in non-purchased loans and leases, exceeding our 2014 growth of $1.35 billion. Our non-purchased loan and lease grew $331 million in this year's first quarter.

$456 million in the second quarter and $680 million in the third quarter resulting in non-purchase loan and lease growth of $1.47 billion for the first nine months of 2015. We are very pleased to have exceeded our minimum goal for full year 2015 loan and lease growth by September 30.

We expect our loan and lease growth in this year's final quarter to equal or exceed the record loan and lease growth achieved in the quarter just ended. We are also very positive about our prospects for another great year of non-purchase loan and lease growth in 2016.

Our pipeline of new loan opportunity is strong as we ever had and we have already discussed, we have our largest ever unfunded balance of loans already closed. Based on these factors among others, we expect growth in non-purchase loans and leases of at least $2.5 billion in 2016.

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

In our previous conference calls, we have said that we expected another year of declining net interest margin in 2015.

Specifically we have said that excluding the effects of any acquisitions beyond the Intervest acquisition, we expected a decrease in our net interest margin in 2015 similar to the 28 basis point decrease in net interest margin we experienced in 2013, compared to 2012.

That previous guidance was based on our achieving $1.35 billion in non-purchase loan and lease growth for the full year of 2015. We have said numerous times the greater non-purchase loan and lease growth would tend to put additional downward pressure on our net interest margin.

While a number of factors contributed to our decline in net interest margin in the quarter just ended, the higher growth in non-purchase loans and leases was one the most significant and probably the most significant factor. We will gladly accept the loan and lease growth.

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

At September 30, our variable rate loans had increased to 75.86% of total non-purchased loans and leases. These actions have been intended to lower credit risk and interest rate risks, but they have also lowered our average yield on newly originated loans. It seems likely to us that we are in the late stages of this business cycle.

And it seems likely to us that the Fed would start raising interest rates sometime in the not too distant future. If those assumptions are correct, defensively positioning our portfolio to minimize both credit and interest rate risks could be very timely and prudent.

And we think becoming more defensively positioned has been worth giving up some margin. Another factor affecting net interest margin is the decrease in volume of loans acquired in earlier acquisitions including loans previously covered by FDIC loss share.

Many of those loans have higher yield reflecting the higher risk profile at the time of acquisition. These higher yielding components of the portfolio are declining in volume at the same time the volume of non-purchased loans and leases is rapidly growing.

This change in mix is good for asset quality but it is contributing to our reduction in net interest margin. This year's acquisitions of Intervest and Bank of the Carolinas increased our volume of purchase loans but did little if anything to increase our net interest margin.

The loan from this year's two acquisition has on average graded better than loans acquired in previous acquisitions and as a result have carried lower yield than the portfolios purchased in most prior acquisitions.

Another factor which seems to have impacted our net interest margin in the quarter just ended is a lower volume of prepayment and early pay offs of outstanding loans and leases. Many loans have yield maintenance provisions or deferred loan fees, the unamortized balances which are recognized as interest income when the loan is prepaid.

Prepayment varies from quarter-to-quarter and while we don't specifically track this data, we believe the positive impact of prepayment on net interest margin in the quarter just ended was less significant than in most other recent quarters.

We expect to see some additional net interest margin compression in the fourth quarter, but we expect a less significant decline than we experienced from the second quarter to the third quarter of 2015. Our current projection for the decrease in net interest margin from third quarter to the fourth quarter is between 7 and 12 basis points.

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

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

For the first three quarters of 2015, our cost of interest bearing deposits has been consistent with that guidance, having increased two basis points in the first quarter, none in the second quarter and two basis points in the third quarter.

We continue to believe that our cost of interest bearing deposits will increase between one and five basis points in the fourth quarter of 2015. And we think that is a reasonable expectation for each quarter of 2016.

Let me remind you that our guidance on net interest margin, including the guidance on cost of interest bearing deposits excludes the effect of any future acquisitions. Another important component of our net interest margin is our profitable deposit mix and careful management of the cost of interest bearing deposits.

In the quarter just ended, we achieved $519 million of deposit growth and our cost of interest bearing deposits increased two basis points to 31 basis points. These favorable results were achieved by utilizing good, low cost funding sources and continue to achieve excellent organic growth of core deposit customers.

As we've previously reported during 2014, we added approximately 9,370 net new core checking accounts excluding accounts acquired in acquisitions.

In the first nine months of 2015 excluding accounts acquired in acquisitions, we've added approximately 9,912 net new core checking accounts exceeding the number of net new core checking accounts added in all of 2014.

Our various deposit growth effort and our ability to achieve strong core account growth have favorable implications for future service charge income and liquidity and have us well positioned for future growth in earnings assets. Now let me turn the call over to George Gleason. .

Thank you, Greg. Traditionally, we've been among the most efficient bank holding companies in the US and the improvement in our efficiency ratio this year compared to 2014 further enhances our excellent standing among the nation's most efficient banks. Our efficiency ratio for the quarter just ended was 37.6%.

For the first time in months of 2015, our efficiency ratio improved to 39.0% compared to 45.3% for the full year of 2014.

While our efficiency ratio will vary from quarter-to-quarter especially in quarters where we have significant unusual items of income and non-interest expense, we stated in recent conference calls, that we expect to see a generally improving trend in our efficiency ratio in the coming years.

This is predicated upon a number of factors including our expectation that we will ultimately utilize a larger amount of the current excess capacity of our extensive branch network.

Our expectation that our core software conversion and improvement projects over the past two years, will further reduce software cost and provide greater functionality for our customers and employees creating opportunities for enhanced operational efficiency. And our expectation of achieving additional cost savings from our recent acquisitions.

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

Our acquisition activity has resulted and is incurring various amounts of acquisition related system conversion and contract termination expenses which have increased our efficiency ratio on recent quarters.

For example, on the quarter just ended we incurred approximately $2.9 million of acquisition related and system conversion expenses and approximately $0.2 million of software and contract termination charges.

These were primarily related to the Bank of the Carolinas acquisition which we completed on August 5 and are expected to convert to our core operating system in early November. In the fourth quarter of this year we expect to incur approximately $750,000 of additional acquisition related system conversion and contract termination expenses.

This guidance does not include the impact of new acquisitions, if any, which we might announce in fourth quarter. At September 30, 2015, our total assets were over $9.3 billion.

As we've previously stated, when we reached $10 billion in total assets either as results of additional acquisitions, organic growth or a combination thereof, we will lose some interchange revenue as a result of the Durbin amendment.

And we will also incur increased regulatory compliance cost, both of which will create some headwinds in our efforts to further improve our efficiency ratio. If we reach $10 billion or more in total assets at December 31 of this year, we will incur revenue loss resulting from the Durbin amendment starting as of July 1, 2016.

If we don't reach the $10 billion threshold until sometime in 2016, we will not incur the revenue loss resulting from the Durbin amendment until July 1, 2017. Based on our current business volumes we estimate that the revenue loss attributable to the Durbin amendment will be approximately $5.35 million per year.

Given our recent growth trends, we may reach the $10 billion threshold by December 31 of this year. In recent years we've been adding staff and taking other actions to prepare for the additional regulatory compliance and compliance burdens associated with exceeding $10 billion in total assets.

We are pleased with our progress and preparations to date and we have detailed plans for further staff additions and other preparatory actions. All these will add additional non-interest expense in future quarters and year.

We expect our annualized additional compliance cost including cost of staff additions to increase compared to our annualized cost for such items in the quarter just ended by about $3.7 million in 2016 and additional $1.7 million in 2017 and another $0.6 million in 2018.

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

In the fourth quarter of last year we entered into agreements with the FDIC terminating our loss share agreements on all seven of the banks we acquired in FDIC assisted transaction.

In our previous calls this year we discussed that our future recoveries, gains, charge-offs, losses and expenses related to the previously covered assets would subsequently be recognized entirely by us since the FDIC would no longer be sharing in such items.

We noted that our future earnings would be positively impacted to the extent we recognized recoveries in excess of the carrying value of such assets and gains on any sales, and that future earnings would be negatively impacted to the extent we recognize charge-offs, losses on any sales and expense related to such assets.

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

All this is played out as expected in the first three quarters of this year. In each quarter of 2015, the combined recovery income and gains on sales of other assets is exceeded our combined net charge-offs, losses on sales and related expenses of purchase loans.

These income and expense items may vary significantly from quarter-to-quarter and absence the addition of new purchase loan volume over time we expect the income and expenses associated with purchase loans will decline. Let me provide a few comments on our excellent asset quality.

At September 30, 2015 excluding purchase loans, non-performing loans and leases as a percent of total loans and leases were 0.26%. Non-performing assets as a percent of total assets were 0.41% and our ratio of loans and leases past due 30 days or more including pass due non accrual loans and leases to total loans and leases was 0.41%.

These ratios of non-performing loans and leases and non-performing assets were our best since the second quarter of 2006, and this past due ratio was our best since the third quarter of 2005.

For the quarter just ended our annualized net charge-off ratio for non-purchase loans and leases was 0.05% and our annualized net charge-off ratio for purchase loans was 0.14%. Our annualized net charge-off ratio for all loans and leases was 0.08% for the quarter just ended.

Our annualized net charge-off ratios for non-purchased loans and leases for purchase loans and for all loans and leases were 0.17% for the first nine months of this year.

When we provided guidance on asset quality in our January conference all, we said we expected our 2015 net charge-off ratio for total loans and leases would not be significantly different from the range of net charge-off ratios we've experienced for total loans and leases in 2013, which was 26 basis points and in 2014 which was 16 basis points.

Our annualized net charge-off ratio for all loans and leases of 0.17% for the first nine months of this year has been at the lower end of that guidance range. Let me close our prepared remarks with a few comments about growth and acquisitions.

Organic growth loans, leases and deposits continue to be our top priority and we have clearly demonstrated our ability to achieve substantial growth apart from acquisitions. De novo branching continues to play a role in our growth strategy and carefully targeted markets.

For example, in the quarter just ended we opened a new loan production office in Greensboro, North Carolina, strategically expanding on our recently acquired offices in the Piedmont Triad region of North Carolina.

And we opened our fifth banking office in Houston, Texas to build upon the momentum we've established in this important metropolitan market like wise in the third quarter we closed an underperforming office from our Intervest acquisition in Clearwater, Florida, leaving us with five offices in that market.

M&A activity continues to be another focus for us as we believe M&A provide significant opportunities to augment our healthy organic growth. On August 5, 2015 we closed on our previously announced merger with Bank of the Carolinas Corporation headquartered in Mocksville, North Carolina.

Our eight newly acquired full service branches between Charlotte and Winston-Salem expand our presence in the northern portion of the Charlotte MSA and provide our initial offices in the Piedmont Triad region.

We continue to be active in identifying and analyzing the M&A opportunities and we believe an active and discipline M&A strategy will allow us to continue to create significant additional shareholder value. In fact, we are optimistic about our potential for announcing one or more acquisitions later this year or early in 2016.

That concludes our prepared remarks. At this time, we will entertain questions. Let me ask our operator to once again remind our listeners have queue-in for questions.

Allen?.

[Operator Instructions] Thank you. Our first question is from Stephen Scouten with Sandler O'Neill. .

Hi, good morning guys, thanks for taking my questions here.

On the organic growth that you had in the quarter, which was obviously impressive, can you give us an idea of the split between what you are seeing in the community bank and what you are seeing in the RESG group? And secondarily on the RESG group, are you guys going to need to add significant headcount or go down different segments within that lending sphere to continue to drive this level of growth?.

Great question. First let me give you the breakdown.

Our real estate specialties group accounted for $488 million of our $680 million in non-purchase loan growth in the quarter so clearly again that was the largest driver; community bank lending groups accounted for $156 million of growth, leasing accounted for $11 million, our stabilized properties group accounted for $29 million of the non-purchase loan growth.

And our corporate loan specialties group actually had a shrinkage of about $4 million. So that's the breakdown and again real estate specialties group followed by a strong secondary role from community bank lending were the key drivers in that growth.

I will note that obviously for both real estate specialties group and community bank lending those were near record if not the best quarters ever for growth from those two units. So very pleased with that.

In regard to our need to add additional staff at real estate specialties group to continue the growth, we are constantly augmenting and adding that team over the course of the last year, we’ve really grown from two teams in each aspect of their business to three complete teams, we continue to augment those teams with additional members and that will continue.

As you know, we traditionally have assigned loans to asset managers at the rate of about 22 loans per asset manager, so they have time to provide the servicing oversight they need to provide to those loans to do the excellent administration work we do on those.

We will continue to need to add people as we add volume related to that as well as people in underwriting and closing and other parts of the operation..

And can you maybe give a little color on what maybe the average loan size was in the quarter relative to that RESG group growth? And if there's any particular segment that you have any concern on, especially -- we are hearing a lot of trepidation around multifamily lending as a whole.

Or is your loan to cost really mitigates a lot of those concerns for you guys?.

I can't give you an average loan size; I just don't have that data available. I can tell you that we are very comfortable with all the assets we are generating there.

Obviously as Greg mentioned in our prepared remarks and I have mentioned in a number of times over the last quarter or so, we think we are getting in the later stages of a real estate credit cycle here, so we are being very defensive in what we are doing. And our primary means of being defensive is to have a lot of equity in our transactions.

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

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

We want to be at lower leverage not higher leverage so that reflects in part - that is reflected in part in our reduction in yield on new loans. We are just trying to get more defensively postured which we think is very prudent. .

Yes. Definitely, definitely. And maybe one last follow-up for me if I can is on the -- you guys gave great NIM guidance there I think and clarity.

But in terms of your ability to keep the NIM flat potentially in 2016 in a higher-rate environment, can you speak at all to what the dead zone might be in terms of do you need 50 basis points to clear the floors in some of these loans that are already at their ceilings and so forth? Or what does that look like as the Fed potentially takes rates higher?.

We've got $4.132 billion variable rate loans in the non-purchase loan portfolio, that's $4.13 billion, and $3.29 billion of those roughly 79.5% just under 80% of those loans are at their floor and will not adjust with the first quarter point move in rates, but almost half of that group with their floor will adjust with the next move from 25 to 50 basis points assuming the Fed moves in quarters.

For example, after a 25 basis point move we’ll have only $1.71 million of those variable rate loans which is 41% of the variable rate loans that will not adjust with the second rate move.

And by the time rates are up, a 100 basis point only $639 million out of that $4.132 billion on loans and that would just be 15.47% of total loans would not adjust after a 100 basis points and move. So your question is really a good question.

The first Fed move of 25 basis points probably does nothing for us; it is probably a push with our cost of funds. The second quarter, the third quarter and the fourth quarter point moves increasingly should be contributory to our net interest income and net interest margin.

And obviously beyond a 100 basis points, if we get to that scenario those increases would be even more contributory to our net interest margins. So as Greg said we expect some further margin compression in the upcoming Q4 and I think you gave your range of 7 to 10 -- 7 to 12 or 7 basis points on that.

And we would expect some further margin compression in 2016 if the Fed does not increase rates.

Once we start increasing rates that first move is probably a push if we get two or three or four Fed rate moves over the course of 2016, I think there is an inflection point there where our NIM actually gets enough benefit from Fed rate increases that it offsets the otherwise or would be expected to be [a defining] [ph] rate of decline in net interest margin.

.

The next question is from Michael Rose with Raymond James..

Hi, good morning. How are you? George, just want to follow up on the margin question, a couple questions here. In past calls, you've given sensitivity for each basis point of margin relative to the growth that you expect.

Can you provide what that sensitivity is at this point, meaning if you grow an extra $100 million, what is the net impact on the margin?.

Michael, there are too many variables that play here for me to try to synchronize that closely. Obviously, we've given the general guidance that if we have more growth that's going to have greater negative down trend on our margin. If we have less growth that's going to have less of the down trend tendency on our margin.

Simply because the greater growth the rates the loans are being priced at today, dilutes the effective or higher yielding purchase loan portfolio.

So you got a variety of factors going on as Greg enumerated very carefully just normal change in the mix cause the higher yielding purchase loans of older are getting a running off and becoming less and less as a percentage of total portfolio and obviously that impact is accentuated by a much more rapid origination in new loans.

So the 28 plus or minus basis point of margin compression guidance that we gave in January was predicated by growth rate this year of about something slightly better than our $1.35 billion in non purchase loan growth from last year of 2014.

And clearly we've already exceeded with the very robust growth we had in Q3, that full year guidance as of September 30. And are expecting an equally good or better growth month or growth quarter in Q4 than we had in Q3.

So that suggest that our 28 basis points of total margin compression for the year is probably going to be on the last side, we are going to exceed that. But we are going to exceed because of things we've discussed for more than a year and that is more growth we have the more dilution to that how margin were going to incur.

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

Appreciate the color. It still seems like, obviously, the real estate specialist group is still driving the bulk of the growth.

Where are the new production yields in that business, i.e., where are you putting yields on the books for new loans at this point?.

Well, where we are putting volume on the books or what is the pricing on new one?.

Yes. What is the yield that the new loans are going on the books at? Obviously, they are lower, which is dragging the NIM down. But I just wanted to get a sense for what that was maybe in the most recent quarter, on average..

Unless you reverse engineer that instead of me trying to give you yield because again the -- that's depended upon the transaction, the top two transaction it is the market in which it is, how complex the structure is, how simple the structure is.

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

One other thing I would comment on the margin and Greg alluded to this I think in his prepared remarks, and that is we have a lot of deferred loan fees and at September 30 to give you a data point we had $21 million of net deferred credits related to originated loans.

So that means that the fees we had properly deferred and accordance with GAAP accounting on those loans was $21 million more than the cost, the origination cost that we had deferred on those loans. And that number is up $4 million from June 30 when it was $17 million and up even from March 31 when that number was just $14 million.

So that deferred fee number is gone from $14 million at the end of Q1 to $17 million to $21 million and that among other factors just contributes to the chunkiness of some of these swings and margins.

If we have a quarter where we have a lot of prepayments and those -- a portion of those net deferred fees that are unamortized drop in income in that quarter then that provides most yield.

If we have quarter where we have loans pay off that had prepayment penalties that provide a boost in yield, or loans that had yield maintenance from minimum interest requirement that provides boost in yield.

We did have a fair amount of that sort of thing in Q1 and Q2 of the year while we don't track the data and I don't have hard data on this, my sense is we had less of that sort of thing in Q3 of the year that would have boosted yield.

So those yield numbers will bounce round from quarter-to-quarter depending on those deferred fees dropping into income on early prepayments, prepayment penalty yield maintenance and other factors that can affect that quarterly number. .

Okay, that's helpful. And then just one final one for me, you guys have opened a couple of different real estate specialties groups' offices over the past few years and you have talked about potentially opening up a couple more.

How much of the growth in the pipeline is coming from some of these newer offices? Are they increasing their amount of contribution? And have they over the past couple quarters? And then how should we continue to think about the Intervest business, which I know you'd talked about being a non-contributor for about a year? Thanks..

New offices for real estate specialties group that we've open in the last couple of years in New York and Los Angeles are making meaningful contributions to our growth. Now clearly our long established Dallas office the customer relationships that we have through Dallas that truly national in scope and include a lot of the major national players.

Dallas is still the key but LA and New York are doing as we expected that they would. They are providing us additional more regional local business contacts in those markets, and they are contributing nicely to our growth.

We had talked in previous calls about opening as many as four or even possibly five more regional real estate specialties group offices either this year 2016, 2017, our expectation for deploying those additional offices have not changed but the timing has changed.

And that simply reflects a fact that we've got so much loan volume right now and we are working very diligently to handle that volume in accordance with our very high standards both from a customer service and a quality control perspective. That it just doesn't make sense for us to open an additional office at the moment.

We've got as much volume as we can effectively handle right now and if we open more offices we might not get more than we actually wanted.

So our timing for the opening of additional real estate specialties group office is somewhat in question, not because we don't expect to ultimately open those offices, we certainly do but like the Fed we are data depended and our loan volume data run now is at a very high level.

And I don't need to open another office and create more volume for that team at the moment.

In regard to our stabilized properties group, as expected I think they contributed $32 million in new loan originations in Q2, $29 million in Q3, they are having run-off that is slightly exceeding that, so as we expect this past year is about push, they are slightly down for the year.

We said we thought we would end the year at about $1 billion in portfolio there, that guidance is still roughly accurate nothing really changed from our pre closing pre acquisition discussions and expectations on that. These guys are working hard; I think they are understanding our strike zone a little better each month.

And my guess is that we will see some positive growth contributions from that unit sometime in 2016, but so far they have not quite been able to offset their run off. .

The next question is from Jennifer Demba with SunTrust..

Thank you. Good morning, George. Question, you mentioned you think we are in the later stages of the real estate cycle.

At this point, are you exhibiting any caution on any particular geographic market or any particular loan categories in the real estate area? And what are you seeing in the oil patch?.

Well, we exhibit caution everyday our hope for the last 37 years on every product in every market in the country.

We are a cautious conservative lender and we underwrite transactions not based on property type or geography but based on the fundamental merits and economic feasibility and strengths and weaknesses of each individual property and each individual market so nothing has changed in the way we approach that.

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

But when you think of oil patch and you think of the geographies in which we operate, obviously Texas is a very big part of our business.

And our total non performing assets in the state of Texas at September 30 were $474,000, essentially nothing and that's compares to non-performing assets in Arkansas of $23.5 million, in North Carolina $5.2 million and Georgia of $6.5 million and Florida $1.5 million.

Our exposure in Texas does not seemed to be showing any signs of detrimental impact from the changes in oil and gas pricing or layoffs in the oil and gas industry. So it really has been to this point and I think to the greatest extent will continue to be non event for us. .

George, does that attitude change on Texas if oil stays at this level for the next one to two years?.

I am assuming oil will stay at this level for the next couple of years. .

Thank you very much..

I'll just point out to you our firm resolve and our opinions and beliefs on that were -- should be very evident from the fact that we open the fifth office in Houston in the last quarter and are very excited about the prospect of that office. .

The next question is from Brian Zabora with KBW..

Good morning, George. A question on the loan/deposit ratio. It's at 97% in the most recent quarter. Your expectations are for very strong loan growth.

Can you talk about expectations regarding maybe restarting those deposit specials and the potential use of maybe using Fed funds or other borrowings to fund the strong loan growth?.

Well, we have a little over $3 billion in approved FHLB advance liability, Fed funds borrowing discount, when the borrowing capability I think it's about $3.0 billion and $3.1 billion of availability there.

We like to keep that availability is really a cushion for fluctuation and the balance sheet potential extreme economic scenario so as a normal rule we do not want to use that for daily fundings other than just to even out fluctuations in those daily funding.

So it would certainly be a cheap source of funds to use that but we like to keep that reserve that cushion as a big, big cushion in reserve from liquidity perspective.

We have in the last couple of weeks began another series of spin up campaign to generate deposits in pretty good chunk of our offices, I don't have the office count but I would guess is 20 or 30 something offices that we have put in to spin up mode as we did last year and you recall I think we spun up about 25 offices last year generated something roughly around $0.5 billion in deposits.

And over the course of the year moved our cost of interest bearing deposits six basis points. So we are in a similar campaign now based on the expectation of continued acceleration in loan growth in Q4. Greg gave guidance, we expect Q4 to be at least as much growth as we had in Q3. And the pipeline going into next year looks very good.

Now with that said I want to give this one caveat. It's still questionable to us whether we are going to break $10 billion in asset at December 31 or not.

So I have told the deposit guys to not hit the accelerator too hard on the deposit gathering and that I don't mind us using some of that cushion of short-term borrowing as of December 31 because I would hate to have them get too many deposits and pushes over the $10 billion mark in December 31, if I didn't needed to fund loan growth.

So they are being a little bit restrained in their growth plans, so you may see our loan to deposit ratio at December 31 temporarily even higher and you may see us using at December 31 some of those short-term overnight borrowing just as we try to manage our balance sheet stay under $10 billion at December 31.

And we will rebalance all that over the course of the first quarter of next year. .

That definitely makes sense. And then on the expense side, I just wanted to see.

Do you think you have realized most or all of the expense saves from the previous yields outside of the Bank of the Carolinas transaction that closed this quarter?.

I think you will see some small part of expense saves from that previous deal several hundred thousand dollars running through Q4, you will see some of the expense saves from Bank of the Carolinas running through Q1 of next year.

Certain elements of acquired staff and acquired operation, you have to keep in place through conversions and other things, other processes that have to be completed. So there is a fair tail several quarters and getting all those expenses normalized.

So we will still probably each quarter of next year be taking out some expenses related to a number of prior acquisitions just as an orderly transition of certain function or certain units is achieved and the cost savings are realized.

But we've apart from the Bank of the Carolinas transaction we've achieved the largest part of cost save related to previous acquisitions as of September 30. But there are still remnants that will be taking up all the way through the fourth quarter of next year almost. .

Thanks for taking my questions..

Of course, glad to take your questions. And I'll add this comment Brian that I hope to confuse that cost question a lot more by adding a number of other acquisitions that create all kinds of complications and figuring out what the run rate really is. So we are going to try to continue to confuse you guys by making a lot of acquisitions. .

Our next question is from Matt Olney with Stephens..

Good morning, guys. How are you? George, can you talk more about your overall capital position? It seems to me like you've been able to find acquisitions that have been accretive to your capital levels, which is obviously very unusual for the industry.

So how realistic is it to assume that you can continue to find acquisitions that are accretive to your capital position?.

Well, I think given our strong organic growth profile we basically resolve that pretty much any acquisition that we do of size going forward we need to do it for all stock or almost all stock. So the acquisitions that we have been doing have largely provided their own capital as a result of the fact that we've done in full stock.

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

So the conservative posture that we have taken on acquisitions, doing acquisitions for stock and our strong organic capital formation have served this well.

When we did this call about 90 days ago I would say we had just a little over $2 billion of growth room based on our current capital base and we still got $2 billion even though we had a record breaking quarter in loan growth. So we are monitoring it very, very closely.

Looking at it very carefully particularly as we ponder the implications of accelerating loan growth potential in future quarters. But we've got life capital margin and the acquisitions seemed to have largely been neutral to us maintaining their margin..

And our next question is from Peyton Green with Piper Jaffray..

Hi, good morning, George. Congratulations on another great quarter. Just wanted to maybe ask a different way. Certainly, the wind is at your back.

And wanted to maybe ask you, where are you seeing, if any, any troubling signs out in the footprint or maybe by products?.

Well, Peyton, obviously we are not seeing a lot of troubling signs, I mean our non-purchase loan charge-off ratio in the quarter just ended was five basis points. If you are doing purchase loans the charge-off ratio on the total basis -- on the total loan portfolio was eight basis points annualized.

And I think we gave stats that are non performing loan ratio to non-purchase loan and non-performing assets on non purchase loans were our best since way back in 2006. Our past new ratio was best past new ratios since 2005.

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

There are markets around the country where one takes note of specific factors. For example to go back to Jennifer Demba's question, Houston is having positive employment growth but given the layoffs in the oil and gas industry it's tiny positive growth compared to the historical norm.

So one certainly takes those factors into account and underwriting projects in Houston, but we've said we got a couple of new projects that we closed or in the process of closing at Houston that we just feel fantastically good about.

If you are in Miami and you look at the change in the buying power and the interest of foreign buyers in buying condos in Miami because of the strength of the dollar and the decline in the South American currencies particularly the Brazilian real and you look at how that changes the processing dynamics was foreign driven buyer market to a large extent.

Then one has to take all that into account. If you look at New York and you look at the run up in land values and condo prices and other things that have occurred really from 2009 to 2014, all that seems to have abated a bit over the last few quarters.

One has to take into account those significant changes in process and ask if that sustainable and real. So pretty much wherever you go in the country and there are some places that I could name where you had a lot of apartments constructed and one has to ask if the demand and employment growth or population growth are there to absorb that supply.

You just have to take all those factors into consideration and whether not you approve a loan, is there a sound loan, is there a sound and viable project, are you defensively enough structured in loans, so that's what we do everyday and we would rather actually see a downturn in the economy. That would work to our benefits substantially we believe.

But I think we are still some quarters away from that. .

Okay. And then, the community bank continues to nicely ramp.

Do you think that your outlook is that it will continue to ramp through the fourth quarter and through 2016?.

Yes. I think so. And I want to be cautious about that outlook but I do have a cautiously positive outlook and as we've talked about in previous calls where our staff there seems to really be jelling nicely and we are getting some good traction.

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

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

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

The next question is from Brian Martin with FIG Partners..

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

And then you talked a little bit about sounding a little bit more optimistic on M&A. Just wondering if there's anything kind of -- those are new markets, existing markets.

And any change in opportunities of size? Are they still more smaller deals or larger deals?.

That's a lot of questions all wrapped into small package there. Let me talk about the M&A area which I think we haven't covered as much. We've continue to be very, very active in M&A. I know some of you commented that it doesn't seem like we've announced a lot of deals this year.

We have had a couple of deals so we worked on and got really laid in that due diligence and other findings very light in those processes cost those bills to not be transaction.

That could be safely done, so we've spent a lot of time working on a couple of transaction this year that just didn't make for reasons that are really beyond our control and I would say we did our due diligence and as a result of our due diligence they were very successful outcomes.

And if we didn't do them, we at all times have a number of transactions that we are working on and we are working on couple of transactions now that we would very much like to get to the table. That's not an unusual statement to make.

I could pretty much have said that at any time in the last three years that we are working on couple of transactions we would like to get to table. But we are working very hard in that regard and as I said in my prepared remarks we are optimistic that we will have something positive to announce in later this year or in the first quarter of 2016.

M&A is a focus; we've got lot of resources devoted to it. We think there are lots of good opportunities out there if we can get them to the end zone. As for the size of transactions, obviously our balance sheet is getting bigger.

The Bank of the Carolinas transaction was about $350 million total asset transaction in round numbers, I am probably understating at a skosh but close there. And that transaction certainly would be on the small size what we would contemplate but that was a wonderful acquisition for us.

We got a great team of bankers and Ed Jordan is leading that Piedmont Triad are for us, an excellent banker. We've got some great offices and some great markets.

They had really done a super job under the leadership of PE guys that had recapped the bank cleaning up their asset quality problems, putting that bank in a perfect position to just step forward in a very positive manner from get-go. So we would do smaller transactions.

If we found feels like that, that were just compelling as bad transaction and I am hopeful to find more of those deals. But our tendency at this stage is to be looking at larger transactions mostly from $700 million or $800 million on the small size to $4 billion - $5 billion on the larger size..

Okay, perfect.

And maybe just the part about the credit cycle, how that plays out from here? Any thoughts on that? Any more color you can give?.

I thought if I ignore that question you might not ask it again. That's really beyond by play grade. I mean we are -- I am saying we are late in the cycle and that's predicated upon various and sundry things.

And when you are seeing valuation of properties go up a lot and a lot of markets around the country look sort of toppy to us which is causing our response to just dig in as low in the caps back as we can get on things we are doing.

You see transactions being pitched that you look at you think more in a normal time, don't think response from this transaction probably would have looked at this deal. It's got issues and variables and questions and things about it, it looks like some spots are reaching find deals and get deals done that make sense.

Just the duration of the current economic expansion cause this one to do math and say we are longer than average here in a period of expansion and you got think we are getting into the end of fact but Fed's talk about rising rates and using when the Fed rate is right, they eventually over do it on the upside and cause a downturn.

You look at the global situation and the slowing growth rates. In China, the severe disarray that a lot of the resources rich exporting developing countries are in, the fairly problematic situation is still existing. In Europe even though the most recent short-term data there looks a little better.

And you just think man we got to be kidding toward the end of the cycle. So I don't know I could be missing that if I am, our shareholder, you can test, ask me for being too conservative and foregoing opportunities that we wouldn't be foregoing if we thought we were early in the cycle instead of late in the cycle. But we do think we are late.

There are lot of things sort of make us feel that way. And we are trying to be able on late in cycle. .

And we have no further questions. .

Thank you, guys for joining our call today. We appreciate it. There are being no further questions. That concludes our call. We look forward to talking with you in about 90 days. Have a great day. Bye-bye. .

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..