Bank OZK
Q2 2013 Earnings Call Transcript

Published: 12 Jul 2013

[Operator:]

Good day, everyone, and welcome to the Bank of the Ozarks Second Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Susan Blair. Please go ahead, ma'am.

[Susan Blair:]

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 in understanding our recent operating results and outlook for the future. To that end, we will 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 margins; net interest income; non-interest income, including service charge income, mortgage lending income, trust income, net FDIC loss share accretion income, 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, including our goals for achieving a sub-40% and eventually, 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 legacy loan and lease portfolio through 2014 and growth from unfunded closed loans; changes in the value and volume of our securities portfolio; the opening and relocating of banking offices; our goals for traditional mergers and acquisitions and making additional FDIC-assisted acquisitions; other opportunities to profitably deploy capital; and our goal of improving on our second quarter earnings in each succeeding quarter of 2013. You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we'll 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 caption of the Management's Discussion and Analysis 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. Now, let me turn the call over to our Chairman and Chief Executive Officer, George Gleason.

[George G. Gleason:]

Good morning, and thank you for joining today's call. We're pleased to report our good results for the second quarter, let's get right to the details. 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. Of course, loans and leases comprise the majority of our earning assets. And in the quarter just ended, our loans and leases, excluding covered loans and purchased non-covered loans grew $286 million, after growing just $42 million in this year's first quarter. As you will recall, we commented in the last conference call that the first quarter is traditionally a period of relatively slow loan and lease growth. On the other hand, as our results for the quarter just ended suggests, the second quarter is usually one of our best quarters of loan and lease growth. Looking at the first quarter results alone, some of you might have adopted an overly conservative view of our loan growth potential. Likewise, looking at the second quarter results alone, it would be easy to adopt an overly optimistic view of our loan growth potential. Bear in mind that this was our best quarterly organic loan and lease growth ever, and established a mark that may not be matched for the next several quarters. Combined, our growth in loans and leases, excluding covered loans and purchased non-covered loans in the first 2 quarters of this year, was $328 million, which is also a half year mark that may be difficult to match in the second half of this year. Our unfunded balance of closed loans, which increased $20 million during the first quarter of this year, increased another $146 million during the second quarter and now totals $935 million. While some portion of this unfunded balance will not ultimately be advanced, we expect that the vast majority will be advanced. This has favorable implications for future growth in loans and leases outstanding. Despite the intensely competitive environment, we are finding opportunities for good quality, good yielding loans. Because our lending teams are maintaining sound pricing and sound credit discipline and getting so much cash equity in most new loans, I believe that the loans we are now originating are of very high quality. In regard to net interest margin, in the January conference call, we stated that we expected our net interest margin in each quarter of 2013 to be somewhere between 5.84% and 5.60%, assuming the minimum expected $360 million of loan and lease growth, excluding covered loans and purchased non-covered loans. In that call, we also stated that if we exceeded that minimum loan and lease growth target, we would expect a slightly lower net interest margin. As an example, we stated that if we achieved $480 million in net growth in loans and leases, exuding covered loans and purchased non-covered loans, we would expect our quarterly net interest margin for 2013 to range somewhere between 5.80% and 5.55%. With the minimal growth in the first quarter, our net interest margin held close to the top of our guidance range at 5.83%. But with robust growth in the second quarter, our margin retreated to 5.56%, near the bottom of the ultimate range we provided in January. This does not mean that we're not getting relatively good yields on new loans. It does mean that the yields we are getting on new loans are not as high as the yields we have gotten in the past. As you -- as we have explained in each of the last 2 conference calls, the more new volume we originate, the more dilutive that will be to our net interest margin. That effect was exaggerated in the quarter just ended by a combination of the unusually large $286 million of growth in new loans and leases, and the unusually large $64 million reduction in our portfolio of higher yielding covered loans. The potential for this sort of scenario or similar scenario prompted us to comment in the last conference call that "other significant changes in the mix of our balance sheet could also affect our net interest margin." Let me give you some updated guidance. First, we expect good growth in loans and leases, excluding covered loans and purchased non-covered loans, in the remainder of 2013. Given the wide variance in such growth for this year's first 2 quarters, we're reluctant to try to precisely predict such growth for any single quarter, but we feel reasonably confident in telling you that we think each quarter's growth in loans and leases, excluding covered loans and purchased non-covered loans, for the remainder of 2013, will be better than Q1, but well below the results of Q2. Second, we are reiterating our previous guidance for a minimum of $480 million of growth in loans and leases, excluding covered loans and purchased non-covered loans, in 2014. Third, we expect some further decline in our net interest margin in the coming quarters, although we do not expect the same magnitude of decline as incurred from the first quarter to the second quarter of this year. More rapid loan and lease growth, coupled with more rapid paydowns in covered loans, both as we saw in the quarter just ended, will amplify any decline in net interest margin. Conversely, slower loan and lease growth, combined with a slower paydown in covered loans, would be expected to result in a more modest decline of net interest margin. Of course, this guidance ignores the impact of our pending acquisition and any additional acquisitions on both the volume of our earning assets and our net interest margin. In recent years, our net interest margin has consistently been among the best in the industry and is truly the result of a team effort. Our deposit team has been very effective in improving the mix of our deposits and steadily reducing our average cost of interest-bearing deposits. During the quarter just ended, they achieved another 3-basis-point reduction in our cost of interest-bearing deposits, from 26 basis points in the first quarter of this year to 23 basis points in the quarter just ended. As a result of our substantial second quarter growth in loans and leases, we will begin to increase our deposit pricing and marketing efforts in several precisely targeted offices or groups of offices as needed, to generate the deposits to fund our expected future growth in loans and leases. Therefore, we believe that our second quarter cost of interest-bearing deposits will be the low point for this economic cycle. And that in the next few quarters, our cost of interest-bearing deposits will increase slightly as we accelerate deposit-gathering activities to fund expected future loan and lease growth. Let's shift to non-interest income. Income from deposit account service charges is traditionally our second -- our largest source, excuse me, is traditionally our largest source of non-interest income. Service charge income for the quarter just ended was a record $5.07 million, an increase of 3.4% compared to the second quarter last year. Mortgage lending income for the quarter just ended was $1.64 million, an increase of 23.7% compared to the second quarter of 2012 but a decrease of 5.6% from this year's first quarter. As we all know, mortgage interest rates increased significantly over the course of the quarter just ended and this was evident in our refi volume. In the first quarter of this year, mortgage refinancing accounted for 64% of our originations, but refis accounted for only 48% of our second quarter originations. The good news is that our mortgage originations for home purchases increased significantly. In fact, our total mortgage origination volume increased from $60 million in this year's first quarter to $61.6 million in this year's second quarter. We typically have somewhat lower profit margins on mortgages for home purchases than on refis, and this resulted in the 5.6% decline in mortgage income from the first quarter to the second quarter. We were very pleased that even with the lower refi volume, we were able to achieve an increase in total origination volume. This increase in total origination volume reflects the expansion of our mortgage lending team over the past year and a continued improvement in the housing market conditions in many of our markets. Trust income for the quarter just ended decreased 2.6% compared to the second quarter of 2012 and decreased 2.0% compared to this year's first quarter. We expect to continue to grow our customer base and expand this line of business. We place no significance on the slightly negative trend in the second quarter trust income. Net gains from sales of other assets were $3.11 million in the quarter just ended compared to $1.40 million in the second quarter of 2012 and $1.97 million in this year's first quarter. Obviously, net gains on sales of other assets were a particularly significant income item in the quarter just ended. In recent years, such net gains have been a meaningful contributor in every quarter. In most quarters, these net gains have been primarily attributable to gains on sales of foreclosed assets covered by loss share agreements. Although our results for the most recent quarter may set a high watermark for some time to come, we expect that net gains will continue to be a significant income item for many quarters to come. 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 clawback 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 related clawback payable are discounted to a net present value, initially utilizing a 5% per annum discount rate. The net discount amounts are then accreted into income over the relevant time periods. In the quarter just ended, the resulting net accretion income was $2.48 million, up from $2.04 million in the second quarter of 2012 and up slightly from $2.39 million in this year's first quarter. This income category would logically be expected to go down as we collect and reduce our FDIC loss share receivable. But in the last 2 quarters, it has actually increased. And as we noted last quarter, on some of our acquired banks, we are collecting our FDIC receivable much faster than previously expected. As a result, in the last 2 quarters, we have recalibrated our estimated accretion amounts for those quarters and future quarters to account for this faster-than-expected collection rate. This adjustment had a favorable effect on net accretion income in the first 2 quarters of this year as we recalibrated our discount accretion over the revised estimated remaining life of the receivable. The adjustments were made to our accretion and will be taking into account ratably over the revised estimated life of the receivable. And thus, the increases in accretion income in the first 2 quarters for this year are not just one time adjustments. Of course, we still expect that the quarterly amount of net accretion income will diminish over time as loss share winds down and as the receivable is collected. Additionally, the amount of net accretion income in future quarters may be adjusted up or down, just as we have the last couple of quarters, if we further revise our estimates related to the timing or the amount of the collection of the receivable. In addition, non-interest income in the quarter just ended included other income from loss share and purchased non-covered loans of $3.69 million, compared to $3.20 million in the second quarter of 2012 and $3.16 million in this year's first quarter. This line item includes certain miscellaneous debits and credits related to the accounting for loss share assets and purchased non-covered loans, but it consists primarily of income recognized when we collect 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 likely 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. You will note from our press release that we had $1.1 million of provision expense in the quarter just ended for covered loans. Obviously, that number reflects covered loans where we were not conservative enough in our initial estimates of cash flows. However, if you consider that number in the context of our gains on sales of other assets, including other assets covered by loss share, and our other income from covered loans and purchased non-covered loans, you can see that our FDIC-assisted acquisitions continue to have a very positive impact on income. Let's turn to non-interest expense. On May 17, we completed the systems conversions of our recently-acquired bank in Geneva, Alabama. Completing this process allowed us to eliminate certain redundant operations and reduce staff, which will result in cost-savings starting in the third quarter of this year. In the April conference call, I commented that we are continuing to have higher-than-desired levels of non-interest expense at many of our offices acquired in the past 3 years due to the elevated cost associated with the high volume of special assets acquired in these FDIC-assisted acquisitions. We are making great progress working through those portfolios and as we move through that process, we have been reducing our non-interest expense in these offices toward a more normal level. The overhead reductions resulting from our Geneva, Alabama systems conversions, along with the overhead reductions recently implemented in some of the offices acquired in FDIC-assisted acquisitions, should almost fully offset the added cost of our new Real Estate Specialties Group loan production office in New York. In recent conference calls, we have stated that one of our key goals is to get back to a sub-40% efficiency ratio over the next 2 or 3 years, and ultimately achieve a sub-30% efficiency ratio, although the timing and likelihood of achieving that latter goal are much less certain. We believe there are 4 key steps we must take to achieve these efficiency goals. First, we must make sure that all of our overhead is incurred in highly productive activities. For example, as we did in the quarter just ended, we must eliminate redundant overhead as we did in Geneva, as well as unneeded overhead, as we did in some of our acquired FDIC offices, and reallocate those overhead dollars to highly productive new activities, such as we think our New York office will be. Second, we have to capitalize on the tremendous deposit growth capacity and fee generation potential inherent within our existing branch network. Third, we must utilize our highly effective Real Estate Specialties Group and leasing divisions to efficiently generate needed loan and lease growth, beyond that which we can generate through our branch network. And finally, we must reload our investment securities portfolio, when market conditions allow us to do so in a safe and profitable manner. While a sub-40% and ultimately, a sub-30% efficiency ratio are both ambitious goals, we continue to think they can be achieved through carefully implementing a combination of these 4 strategies. We are continuing to invest in markets we believe to be important for our future. The Most notable example of this is our recent announcement of the addition of a Real Estate Specialties Group office in New York. On many of the Real Estate Specialties Group's transactions, the equity dollars, subordinated debt or mezzanine financing come from New York area sources. As we've worked with these sources over the years and built relationships, it has become apparent that having staff on the ground in New York will allow us to better serve our existing relationships and capitalize on future business opportunities. In North Carolina, we're moving forward with construction of a new full-service banking office in Cornelius, which we expect to open in the first quarter of 2014. In Bradenton, Florida we are presently developing 2 new banking offices, with scheduled openings in the third quarter of 2013 and the fourth quarter -- I'm sorry, first quarter of 2014. One of these offices will replace a leased facility we will be vacating, and the other office will be in addition to our branch network. In Savannah, Georgia, we are beginning development of a new banking office with an existing opening -- expected opening in the first quarter of 2014 to replace our current leased facility. On January 24, we entered into a definitive agreement and plan of merger with the First National Bank of Shelby in Shelby, North Carolina. First National Bank has a rich heritage dating back to 1874 and operates 14 North Carolina banking offices in a 4-county area west of Charlotte. We have been operating in nearby Charlotte for over a decade, giving us good insight into these markets. The closing of the transaction, which is subject to First National Bank's shareholder approval and certain other conditions, is expected to be accretive to our book value per common share and tangible book value per common share. The transaction is expected to close in late July or early August of this year and it will be accretive to our diluted earnings per common share for the first 12 months after closing and thereafter. The transaction timetable has been extended slightly from that initially contemplated. As a result, our target date for post-closing systems conversions and achievement of all of the related efficiencies and cost savings will be delayed for a few months beyond that originally anticipated. In light of that, we expect that this transaction will have a minimal positive impact on our earnings in the third and fourth quarters of this year and the first quarter of next year, since a large portion of the earnings of this acquired operation in those periods will be offset by transaction cost, conversion cost and duplicate overhead, which will take longer to rationalize than initially anticipated. We now expect to see the more significant benefits from this transaction in net income, starting in the second quarter of 2014. We continue to be active in identifying and analyzing M&A opportunities and we expect this to continue to be an important part of our business going forward. One of our long-standing 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 the key asset quality ratios in the quarter just ended. Our annualized net charge-off ratio for non-covered loans and leases improved to 12 basis points for the second quarter of this year, compared to 18 basis points for the second quarter of last year and 19 basis points for the first quarter of this year. At June 30, 2013, excluding covered loans and purchased non-covered loans, our ratio of nonperforming leases to total loans and leases was 65 basis points. Our ratio of nonperforming assets as a percent of total assets was 66 basis points, and our ratio of loans and leases past due 30 days or more, including past due nonaccrual loans and leases, was 74 basis points. All these ratios were higher than they were at March 31, 2013, but the increase is primarily related to a single $6.8 million credit, originated several years ago by our Little Rock lending team to a Little Rock borrower on an Oklahoma City project. We appear to be very well secured on this project and we anticipate no loss. Of course, even with this project included, all of our ratios are still very favorable. In our January conference call, we stated that in 2013, we expected to see further reductions from our overall 2012 net charge-off ratio of 0.46% and our overall 2012 net charge-offs of $12.2 million. Both our first and second quarter results are consistent with that guidance. In recent years, we have accumulated a sizable war chest of capital through retained earnings. We believe that we will have numerous opportunities over the next several years to profitably deploy our accumulated capital, and that the most immediate capital deployment opportunity we foresee is growth in our legacy loan and lease portfolio. A second opportunity relates to traditional M&A activity and an area on which we have increased our focus. The third opportunity will likely come whenever interest rates increase significantly and we consider it timely to reload our investment securities portfolio. The fourth opportunity for capital deployment may be additional FDIC-assisted acquisitions. In closing, let me say that our goal, which we believe is a reasonable goal, is to improve on our second quarter earnings of $20.4 million in each succeeding quarter of 2013. That concludes my prepared remarks. At this time, we will entertain questions. Let me ask our operator, Nancy, to once again remind our listeners how to queue in for questions. Nancy?

[Operator:]

[Operator Instructions] We'll go first to Michael Rose with Raymond James.

[Michael Rose:]

I just wanted to get a little context on the growth in the unfunded commitments this quarter or unfunded closed loans. I know you opened up the office in New York. How much of the growth is coming from New York? Is it relatively little at this point? And then kind of how additive do you think opening an office there could be over the next couple of years?

[George G. Gleason:]

Well, we didn't open the office until July 5, so none of growth in the second quarter, funded or unfunded, came from that office. Now we have been doing business in New York quite a while, and that really evolved over the years, as we were doing transactions with customers in other locales and began to have a lot of relationships develop with New York sources of equity and mezz debt and various things. So we developed relationships with those folks just through closing those transactions and that's led us to begin to do more business up there. Now we did have some loan closings in New York in the last quarter on a couple of transactions, but they were transactions that were already in the works by our Dallas office, before any idea of a New York office really came to pass. As far as the potential for that in the future, I think it has significant potential. Obviously, New York is a huge market and a very vibrant economy. And frankly, doing business in New York involves a lot of complexities that are not present in other markets in the state -- in the States, United States. And as you know, our history has been to thrive in doing transactions that involve a lot of complexity. And certainly, doing construction lending in New York involves a lot of complex issues that are not present elsewhere and we've spent a lot of time studying that. I think we have a good handle on that. I think we have good processes in place to deal with that added complexity and we think it's going to be a meaningful market for us.

[Michael Rose:]

Okay. And then just on the -- I think you mentioned you're planning to raise a little bit of deposits here. How should we think about that in the context of funding costs in the margin guidance that you kind of laid out?

[George G. Gleason:]

Well, we have talked for some time about the fact that we've done an analysis of all of our branches and we're not going to raise deposit pricing across the board. We're going to take branches where we have small market share, small amount of deposits that can be repriced in our legacy book there and significant growth opportunities, and we're going to spin those markets up really 1 or 2 or 3 at a time, as needed to generate the growth. So we won't have a wholesale adjustment in our deposit pricing. So as I said, I think we probably have hit the bottom on deposit pricing, net interest or interest-bearing deposit accounts of 23 basis points in Q2. I would be very surprised if that number rose more than 1 or 2 basis points a quarter over the remainder of the year as we begin to generate. We think we can generate several hundred million dollars of deposits and move the needle on that only 1 or 2 or 3 basis points over a 6-month period of time.

[Operator:]

We'll take the next question from Matt Olney with Stephens.

[Matt Olney:]

George, we've heard from some other banks that they're getting more aggressive in the construction area and that seems like a niche that you've carved out for several years now. So are you seeing more competition in the construction area? And what's the pricing been like in that area?

[George G. Gleason:]

Matt, I would say we've seen no fundamental change in the competitive landscape in that area over the last couple of quarters and not significant fundamental change in the pricing. Our -- the majority of our growth in the second quarter was not in construction, although construction grew. Our commercial real estate properties went from $824 million at March 31 to $1.017 billion at June 30, $1,017,000,000, which moved that number from $824 million at March 31, or from 38.2% of our portfolio at March 31, to 41.6% of the portfolio at June 30. Our construction book actually went down from 28.9% to 27.9%, although the numbers went up from $623 million to $680 million. And obviously, as you can tell, we closed a lot of loans that are construction loans at minimal or little funding, as evidenced by the significant growth of unfunded balances. So I think a lot of banks probably are venturing back into construction financing, but they're -- I don't think they're probably venturing into the areas that we've done.

[Matt Olney:]

And then thinking more about the change in interest rates in recent weeks and months, does this at all change your strategy or your outlook? Or how are you now looking at the securities markets and the opportunities for your bank?

[George G. Gleason:]

We're closer, but a long way away from being able to reload our investment securities book. Certainly, there was a pretty dramatic move in rates in the second quarter, but that's just the first taste of what I think is to come over the next several years. So you notice in our list of capital deployment opportunities, we moved investment securities up to the -- reloading the investment securities book up to future opportunity #3 from #4, and dropped FDIC-assisted acquisitions down to a pale #4. And that reflects that, based on the significant move in market interest rates on debt securities in the past quarter, we think we're one step closer to the day we can reload that bond book, but I think there are a lot of steps still to go before we wholesale reload that book. I think, in that regard, the wisdom of our keeping our bond portfolio screwed down as small as we can really keep it, and run our balance sheet the last year, has borne fruit in this last quarter. Certainly, we had a negative mark on our book, as any bond book is going to get a negative mark when rates rise, but certainly, that would've been a lot worse if we had a much bigger, bigger bond book. As for FDIC-assisted acquisitions, since I've talked about the shift in priority of those 2, obviously, that just seems to be a diminishing area of opportunity,, although we're still open to pursuing those opportunities.

[Operator:]

We'll go next to Kevin Reynolds with Wunderlich Securities.

[Kevin B. Reynolds:]

Question for you on the loan growth. It's surprisingly strong this quarter, right, and we actually expected it to accelerate there. But does it -- when you think about your prior guidance, you've said -- you're talking about $360 million to $480 million for the full year being -- maybe not guidance, but expectations, let me use that term. This plus the first quarters loan growth gets you well down that path. And I know you're not necessarily backing off at all on what you're doing day in and day out, but does this allow you to be a little bit more selective in the second half of the year and maybe protect your margin a little bit better than maybe you would have expected at this point? Or is that not something that might play out in the rest of the year?

[George G. Gleason:]

Kevin, we're protecting our margin with every loan we make by only doing those loans that we feel provide us an appropriate risk-adjusted return. So our exceptionally good growth in the second quarter was not a result of us getting any more aggressive at all on pricing. We followed the same parameters and guidelines and goals on pricing in Q2 that we did in Q1. It just happened to be that Q2, everything sort of fell into place as far as getting things closed and we did book a lot of business. And obviously, a significant adjustment there. So no, we're not going to slowdown at all to try to cherry pick deals to raise our margin or whatever. We're going to make every good quality, good yielding loan we can make consistent with safe, sound and prudent banking practice. Good yielding means that it's got to have an appropriate risk-adjusted return for all of the elements and factors and work involved in the loan, so we're going to make every one we can make.

[Kevin B. Reynolds:]

Okay, and then I guess with respect to those, the actual loan originations that you did in the quarter, you may have addressed this and I apologize, I was trying to keep up with you during the conference call, during the prepared remarks, but did -- how much of it would you say was sort of Bank of the Ozarks specific, that you just had some things -- like you said, just kind of came together, and how much of it might be that borrowers in general out there were feeling better in the second quarter versus first quarter? I know as we started the year, there was a lot of anxiety out there about the impact of slowdown in government spending on the overall economy. Are borrowers feeling better? Or was it just that the calendar came together and things that were already in the works that were going to close anyway happened to close in the second quarter?

[George G. Gleason:]

I don't know the answer to that, because I don't know what's in the minds of every one of our borrowers. But my sense would be that it was just that the calendar came together in a nice way and we just got -- we've got a lot of business we've been working on. As you know, sometimes, given the complexity of some of the transactions we do, we work on those for quarters and in some cases, years or a year or more, before we actually get to the point of closing in one of those transactions. So, a lot of stuff we've been working on for a while all came to fruition, and then a lot of customers came in and had what they perceived as really great opportunities. And they were really anxious to get them closed and they put a significant press on to get them closed and wanted to get them closed in the quarter. I'll give you an interesting number, our -- excluding purchased covered loans and purchased non-covered loans, our loans grew $38 million in April, $74 million in May, and $174 million in June. And at the first sentence of your question, you mentioned the word acceleration, that was pretty good acceleration.

[Operator:]

The next question comes from Andy Stapp with Merion Capital Group.

[Andrew W. Stapp:]

Could you talk about the yields you're getting on new loans and securities that you are putting on your books?

[George G. Gleason:]

Andy, I can talk about it but I don't know that I can -- I don't know that I can give you meaningful guidance on that. We're -- it depends on the credit. We're booking some loans that -- and the complexity of the credit. We're booking some loans that have a LIBOR 3.25% rate and a 4.5% floor. We're booking some loans that have a LIBOR 4.25% rate and a 6% floor, and we're booking consumer loans that would range from 4.5% to 9% depending on the profile of the credit. So it is very much credit dependent and we're very precise in the way we price those things based on individual credits and the interest rate risk involved in it, the credit risk involved in it and the complexity of structuring, closing and servicing the transaction.

[Andrew W. Stapp:]

Okay. And expanding on Matt's question, could you provide an order of magnitude estimate on the rate you'd need to reload your securities book?

[George G. Gleason:]

Probably not, because I think that's going to be very much dependent on macroeconomic conditions at the time, and it's impossible. I don't have a good enough crystal ball to be able to tell you what The Fed is going to do next and what's going to happen in Europe, what's going to happen in Asia, and how all that's going to affect the economy. And I think it truly is one of those we'll-know-it-when-we-see-it situations. And hopefully, we will know it when we see it and we'll get it right, but I do think we're a long way away from that.

[Andrew W. Stapp:]

Got you. And lastly, what are you seeing in terms of loan demand in your Georgia markets?

[George G. Gleason:]

We're actually seeing some. I mean, it's not blowing the doors off, but it is better. And I'm proud to say, proud of our Georgia guys. They actually got their non-loss share originations up over 2% of our total loans last quarter. So I think I'm -- I'm trying to put my finger on the piece of paper, I think it's -- but I can't, I think it's 2.27% of our loans were -- Yes, Greg. Greg is helping me out here. Yes, 2.27% of our loans, non-loss share loans at June 30 were from Georgia. So we're proud of those guys that they're getting a little positive momentum and we're beginning to book some business over there. It's a tricky market because there are so few good loans. Pricing is crazy and there's still a lot of problems with the market over there. So they have a combination of very aggressive pricing and a very tricky and dangerous market. So we're having to be very careful to find things that we really like the credit quality on that meet our risk -- risk-adjusted standard but they finally, after 3 years of us being over there, got above 2% of our non-loss share loan portfolio. So we're now challenging them to figure out a way to get to 3%. It's a game of inches right now.

[Operator:]

We'll move next to Brian Zabora with KBW.

[Brian James Zabora:]

A question on net interest income. Do you think with the late quarter growth or maybe accelerating growth in the quarter, should we see net interest income trends better compared to the first quarter versus second?

[George G. Gleason:]

Yes. I mean, certainly, booking $175 million in June and honestly, half of that growth occurred on the last day of the quarter, the 28th, so I got 3 days of income out of that. So yes, we think that will have very meaningful impact. So I mean, you can look at our end of the quarter balances of assets and compare them to the average balances of assets and project that forward and that suggests that, that should have positive implications for us.

[Brian James Zabora:]

Great. And then just as a second question on loan to reserves, it's right around 1.60. Is there a floor or do you think that you will have to increase provision expense as loan growth has been accelerating?

[George G. Gleason:]

Well, fortunately we're not putting up as much provision for new loans as we're working off for loans that previously had special reserves or allocations or were less favorably risk rated. And part of that just continues to be the fact that on our new loans, we're getting so much cash equity in those that, that high level of equity results in lower levels of allowance allocations for those loans. We've got a loan where we're 24% loan to cost or 37% loan to cost or 50% loan to cost. We just tend to assign lower allocation percentages to those loans than we do loans that are 60%, 70% and 80% loan to cost. So we're following the same formulas. We'll go wherever that formula dictates. If we can continue to generate very low leverage, good volume of new loans, we'll have to put up a reserve for that. But the reserve percentage may continue to come down if those are very low leverage loans with low risk allocations. And at the same time we're booking those, we can work off credits that are sort of carryovers from the prior cycle that we've got special allowances and special provisions for that we're working through. And we seem to be whittling through a fair number of those each quarter. And freeing up those allocations related to those loans as we work them out on terms better than we thought we might is helping us to lower that provision expense.

[Brian James Zabora:]

Great. And just lastly, I get the sense from your comments that maybe the FDIC-covered runoff was a little higher than you were expecting or maybe that pace might slow in coming quarters. I know it's tough to predict, but just say your thoughts around that.

[George G. Gleason:]

It is impossible to predict because there's so much of it that is a result of prepayments. And it's a double-edged sword, when you have -- Greg, what was it, $60 million of runoff in Q2, which was higher than we probably had in any other quarter and certainly, higher than we expected. You saw that translating through into higher FDIC accretion income and higher recovery income because it leads to resolution of those things faster and accelerates the receivable, or if you get a full payoff on something, it reverses the receivable and whatever discounts you had on it and then drops into income. And if you had a credit mark on it or an NPV mark on it, all that drops into recovery income. So you saw those elements of noninterest income accelerate this quarter and they accelerated because the payments, paydowns and payoffs of those loss share loans accelerated. So that cost us some money on the interest income side and on the margin. But it contributed to an uplift on the noninterest income side as a correlation to that.

[Operator:]

And the next question comes from Peyton Green with Sterne Agee.

[Peyton N. Green:]

One question. George, you mentioned that you expected the organic loan growth to slow a bit. I was just wondering, historically, the pipeline has been in very good shape and I guess was building through various levels of it. Maybe if you could give a little color on how the pipeline looked at the various stages that you all track.

[George G. Gleason:]

Well, the pipeline, honestly, looks very good. Obviously, the closed and unfunded is approaching $1 billion so that looks very good, and the other loans in the pipeline all look very good. The second quarter's growth, Greg, what was it, $280 million?

[Greg L. McKinney:]

$286 million.

[George G. Gleason:]

$286 million. The second quarter's growth of $286 million is exceptional. And my cautionary comments simply are intended to avoid someone latching onto that number and saying, "Wow, this is the new growth rate," just as it would have been inappropriate for them to latch on the $42 million in Q1 -- $42 million growth rate in Q1 and say, "This is the growth rate." Neither one of those numbers are indicative of where we think growth is going to be. So we're not necessarily trying to be negative on growth, I just don't think we can do $286 million again. I mean, that was an exceptional quarter and even though we've got a great pipeline and even though our closed and unfunded is at an all-time high, I don't think that -- and I could be wrong, but I don't think it gets us to $286 million next quarter or the fourth quarter. That's a number it may take quite a while for us to climb back to that level for a single quarter.

[Peyton N. Green:]

Okay. No, I was just curious, I didn't know if there was more pull through of the pipeline just with the way things ran in June or if it's still in really good shape.

[George G. Gleason:]

No. I mean, we did close some things in June that when they came in, I thought, well, that will be a July or August closing. But at the same time, we had a couple things lined up to close in June that for one reason or another, got delayed that should now close in July and August. So there was a little flip both ways. But again, Q2 was -- I'm really glad to have it and -- but $286 million is a pretty big number for us for a quarter.

[Peyton N. Green:]

Sure, sure. And then on the First National Bank of Shelby deal, I know the legal closing, I guess, slipped by about a month compared to what you thought it might be earlier on. But it seems like maybe the conversion and the redundancy elimination has slipped out maybe 1 quarter or 2, beyond what we would have previously thought. Is there anything that you have seen that you just have decided to do different or were -- did things just move around because of the legal closing?

[George G. Gleason:]

Thank you for paying such close attention. You're exactly right. We got held up on getting our registration statement effective with the SEC. It took us about 30 days longer, and really, they did a comment letter and a second comment on our deal. We answered all their questions and we're -- I think had everything answered, and the guy who was doing it at the SEC went on vacation and came back the day after our financials went stale. And he said, "Well, you answered all our questions, but as of midnight last night, your financials went stale. So you're going to have to update for Q1 financials." So that kind of just fortuitous circumstances put us in a situation where we got our registration statement effective, Greg, 30, 45 days later than we thought. And because we were targeting a September-October timeframe for conversion, that then kicks us into a November-December timeframe. And it's not just FIS and there are a half dozen other companies that are involved in the data processing conversions that all have to kind of -- you have to get in everybody's time box. And one of those, in particular, will not convert anybody from November 15 through December 30 or actually the first week of January, January 7, I guess, or something. So the 45 days would have kicked us into that timeframe and because of that -- so we're -- we got kicked another 45 days. So you're right, a 30- to 45-day delay in the closing of the transaction basically has kicked our conversion 3 to 4 months out farther. And it really messed -- everything we do here is so planned and so orchestrated and there's a cadence and a rhythm to everything we do here all the time. It just messed up the cadence of our deal and it's going to keep us from getting a lot of cost saves we expected to get. It's going to delay those cost saves about 3 or 4 months further out, and actually, will create some increased costs from running redundant systems and so forth for that 3 or 4 months. So it's a minor disappointment and a minor frustration, but we'll -- it's still -- we still are very pleased about the transaction. I think it's going to be a great transaction for us. You're just not going to see much of an impact in Q3, 4 or 5. I mean, it'll obviously affect our balance sheet a lot and we'll have some minimal positive earnings contribution from it. But where you'll really see that coming in is in Q2 of next year, after we get the systems conversions and really get all the cost saves in and getting them on our system. And you'll see the real pop from that deal in Q2 of '14. Won't get much noticeable benefit in the third quarter, the fourth quarter or the first quarter of next year.

[Peyton N. Green:]

Okay. And then, last question. There have been a couple good-sized deals in Arkansas that happened in the last 30, 45 days. And I was just wondering how the regular way M&A outlook is, your pipeline, your interest in doing it, or does the organic growth opportunity look a lot better now that you might not worry about M&A opportunities as much as you would have 6, 9 months ago?

[George G. Gleason:]

Well, I would say the M&A pipeline looks really good. I mean, we're still actively working on things there. Obviously, you're seeing a lot more M&A activity so that may create some pricing pressure that may cost us some deals we might otherwise have gotten done. But we're still out there working hard on that, have some finds [ph] in the water on that and I think that's an important part of our story going forward. On the other hand, obviously, the organic loan growth potential, we've been talking about it and we've had 6 or 7 quarters in a row now of positive growth. Some of those quarters, very impressive quarters. Others, less impressive quarters of organic loan growth. So I think a lot of folks that are sitting in -- on your side of the table there have been saying, well, I wonder if Bank of the Ozarks really is going to be able to generate the organic loan growth that's needed to make an effective handoff between the wind down over the next several years of the revenue components coming from these loss share acquisitions and offset that and generate positive earnings momentum from organic loan growth. And I think some of the folks, again, on your side of the table have been thinking, "Well, they may not be able to get there with organic loan growth, but maybe acquisitions will get them there." And I would hope that the fairly substantial growth that we generated in Q2, combined with the significant growth in our unfunded and closed book of loans would probably finally put to bed once and for all the question of, "Wow, are they going to be able to make that handoff and keep positive earnings momentum over the next several years, even as loss share goes away from organic growth?" I think we can do that. We think that additional traditional M&A activity can augment that, but is not necessary. So it's an important part of the puzzle, but it's not a critical part of the puzzle. I think we can have really good positive earnings momentum over the next several years without it, through organic growth, but we'd like to put that icing on the cake so to speak and have that extra oomph from that if we can.

[Peyton N. Green:]

And then a follow-up on that. I mean, the runoff did accelerate in the second quarter. Was that because the borrowers themselves are more attractive to other banks to finance? Or is it just -- I don't know if values have gone up enough where there's more of a margin of safety in some of these loans that they can get refinanced elsewhere or what are you really seeing happen with that? And I know historically you said that about 1/3 of the portfolio would be the stabilized book off the $1 billion or so that you acquired of the 7 deals. Is that still a good bogey out 5 or 6 quarters?

[George G. Gleason:]

Peyton, I don't know. We got a lot of payoffs in Q2 and it's hard to know whether that's a trend or just an anomaly on a quarterly basis. And as I mentioned in talking about new loan growth in Georgia, it is a very competitive market and there's not many good loans. So banks are killing themselves over there for anything that is close to being good business. So that certainly was one factor, I'm sure, that contributed to that. And the fact that collateral values are getting a little better in some markets probably helped. And the fact that people are kind of recovering from the beating they took in '07, '08, '09, '10 over there. All those are various factors that contributed to a higher level of that. I don't know if that Q2 is a new norm or if it's just a 1 quarter anomaly. We're going to have to wait together to figure that out.

[Peyton N. Green:]

Okay. And then the stabilize, do you still feel like generally it will be about 1/3 of the original acquired balance or is that hard to say?

[George G. Gleason:]

That's hard to say for the same reasons. If Q2 is the new norm, then that's going to stabilize at less than that, I would guess. If Q2 is an anomaly and we return to a more normal rate based on our past experience and a slowing rate as we would expect of payoffs, then that number is probably still good.

[Operator:]

We'll move next to Jennifer Demba with SunTrust Robinson Humphrey.

[Jennifer H. Demba:]

Peyton actually covered my delay of system conversion question, so I don't have any more.

[Operator:]

We'll go next to Joe Fenech with Sandler O'Neill.

[Joseph Fenech:]

George, building on the last question, with some of the transformational deals for some of these Southeast Community Banks and how well-received they've been, obviously, Shelby was also very well-received but you probably wouldn't characterize it as transformational. But with that deal closing now relatively soon, the delay notwithstanding, would you be willing to pursue that one transformational deal? And if you would be willing to do that, what are some of the specific conditions, whether it be financial or geographic, and would you be comfortable doing something like that while the Shelby integration is ongoing?

[George G. Gleason:]

Well, certainly, we would be comfortable doing another transaction. While Shelby was going on, we've had an offer outstanding at least 1, I think 2 probably, since we did this deal on other transactions. So it wouldn't bother us at all to have 2 or 3 transactions going in the conversion cycle at once. We've done that before with the FDIC transactions and well, that wouldn't be a problem at all. We've got enough capital right now to do, for cash, an acquisition that would involve about $2 billion in assets and still be at very, very, very well-capitalized levels that would meet our internal standards for capitalization, as well as all the regulatory standards. So we've got plenty of capital to do acquisitions, we've got plenty of resources to handle acquisitions and conversions and acquired assets and systems and so forth. So we're in good shape to do whatever makes sense. Now would we do a transformational deal? I mean, I'm not sure that I have in my mind what a transformational deal would be for us. And I don't know frankly, that I want to transform what we are a lot. I really like our company, I like the way it operates, I like the results we achieved. So if we did a transformational deal, it's really going to have to be a deal that is just highly additive to what we already do, because we like what we do and we think we do it really well. So I don't really know how to answer that question beyond giving that color and comment on it, Joe.

[Joseph Fenech:]

Okay, fair enough. And then, George, I think I know the answer to this but if you can clarify. Do you think it would ever make sense for you to have a more traditional branch presence in New York or is this just sort of a different sort of animal from a lending standpoint and you would probably rule out having a traditional branch presence in New York?

[George G. Gleason:]

Well, I guess, on the -- following the old adage of never say never, I should not say never, but it is extremely hard for me to imagine that we could have a competitive branch network in a market the size of New York doing retail banking. I think we can go in there and do a particular loan and financing transaction and compete and be as effective at doing that as anybody locally. The cost of doing business in New York is so high and the scale that you would have to have to do an effective branch network there would have to be so big to justify that cost, I just -- I don't see that being a likely outcome for us from our original loan production office there.

[Operator:]

The next question comes from Brian Martin with FIG Partners.

[Brian Joseph Martin:]

Just the OREO, I guess, the OREO income and the recovery income. This quarter it was -- obviously, you talked about them high. In the past, you kind of looked at them being volatile quarter-to-quarter, but just looking kind of year-over-year, maybe being similar type of levels as things kind of even out. With the pickup this quarter, I guess, are your thoughts still that we should look at it kind of year-over-year and still expect results to generally be similar, or does that change now with some of the things that have occurred this quarter and last quarter with the recalibration?

[George G. Gleason:]

Well, we did have an unusual level of sales activity and prepayments, in part due to the fact we had such a high degree of paydowns on that portfolio this quarter. So I think our guidance that we gave in the past that we would expect those recovery income and other loss share income and gain on sale numbers this year in Q3 and Q4 to -- or this year in 2013 to be roughly equal to 2012. I think that's probably good guidance and the way I would interpret that probably going forward is I would take 2012, divide the numbers in those categories for other loss share income and gain on sale by 4 and sort of ignore what happened in Q1 and Q2 of this year, and just assume that Q3 and Q4 are going to be kind of in line with the average of '12. And this number is going to be volatile, so whatever estimate you adopt is going to be wrong and whatever estimate I adopt is going to be wrong. But that's probably the way I would approach it. I wouldn't say, well, I don't think we can -- I think each quarter and the results of each quarter are really independent. And just because we had exceptional results in Q2 doesn't mean Q3 and Q4 are going to be lower than they would have otherwise been. They really are all independent entities. So take -- that would be my recommendation. Does that make sense?

[Brian Joseph Martin:]

Yes, that's helpful. And then just 2 other things. The margin impact, you talked a little bit about your expectations. As far as the impact with regard to Shelby, can you give any thoughts on that or color on that? The impact?

[George G. Gleason:]

I don't think Shelby's going to move the margin a lot and we really won't know that until we get over there and finish the valuation on the loans, and I think we're scheduled to do that from like the 22nd to the 27th or 28th or something. That week we're going to have our asset valuation guys in there and they're going to be putting all the credit marks and all the NPV marks on all the loans. We're going to have a huge team of folks going over there doing that, so we'll actually have those numbers in tow when we close the transaction.

[Brian Joseph Martin:]

Okay, all right. And then maybe just one last thing. On your loan guidance or just kind of your kind of expectations, if you will, when you look at 2014, with the opening of the New York office, is that -- I guess, it seems like you'd expect that loan growth given the significance New York can contribute to be -- to move higher in '14 relative to previous targets. But I guess, was some of that maybe already baked in, with the real estate group in Texas doing some of that business, or is it, I guess -- am I thinking about that wrong?

[George G. Gleason:]

Well, I think your thoughts are right. If we've got a high-powered lending team on the ground in New York, if they don't stir up a good bit more business than we would've gotten otherwise, then I spent a lot of money I didn't need to spend. So yes, I think they're going to be meaningful contributors and contributors beyond what we would have gotten otherwise. I will point out to you that our guidance has always been minimum guidance, $360 million for 2013, we said that's a minimum. A lot of folks thought that probably sounded like maximum guidance when we initially gave it, I'm sure, and pie in the sky guidance. And of course, after the first half of this year, I think, folks are saying, "He really meant minimum." And we, in commenting on our guidance for next year, we said that is a minimum number. Our loan results varies so much from quarter-to-quarter, it's hard to get more precise than that. And obviously, we've seen that over the last 2 quarters, very extreme numbers from Q1 to Q2.

[Operator:]

[Operator Instructions] We'll go next to Blair Brantley with BB&T Capital Markets.

[Blair C. Brantley:]

Most of my questions have been answered. Anything change with the tax rate going forward? It looks like it went up a little bit this quarter.

[George G. Gleason:]

Greg, you want to comment on that?

[Greg L. McKinney:]

Blair, that's just primarily driven by the composition of the earning assets. I mean, if you'd look at the bond book, the bond book is the primary driver of any tax stamped interest income. Debt bond book as a percent of earning assets is -- it ticks down a little bit as we've continued to layer in some loan growth. That bond books is basically flat but that's the primary driver on any movements up or down in our tax rate. So that's given the fact that, that as a percent of asset has declined ever so slightly over the last several quarters. That's the growth driver in the tax rate ticking up just a little bit.

[Operator:]

And we have no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

[George G. Gleason:]

Thank you very much for joining the call. We appreciate it, we look forward to being with you again in about 3 months. Thank you. Have a good day. That concludes our call.

[Operator:]

Again, that does conclude today's presentation. Thank you for your participation.