Welcome to the Bank of the Ozarks Incorporated Fourth Quarter Earnings Conference Call. My name is Vanessa, 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. It is now my pleasure to turn the call over to Susan Blair. You may begin.

Good morning. I am Susan Blair, Executive Vice President in charge of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company's results for the quarter just ended and our outlook for upcoming quarters. Our goal is to make this call as useful as possible 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 in other disclosures and presentations, we may make certain forward-looking statements about our plans, goals, expectations, thoughts, beliefs, estimates and outlook, including statements about economic conditions in the United States and globally, including the state of the current United States economic recovery and certainly economic and geopolitical risks, real estate market, competitive credit market and interest rate conditions, including expectations for further changes or adjustments in monetary and interest rate policy by the United States Federal Reserve, revenue growth, including the possibility for additional revenue growth in 2016 from reallocating overhead from less productive activities to geographies and areas of business, which may be more productive, net income and earnings per share, net interest margins, net interest income, the expected impact of recent actions intended to reduce our cost of federal home loan bank FHLB borrowings, 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 and other assets, non-interest expense, including acquisition-related, systems conversion and contract termination expenses, our efficiency ratio, including our goal for achieving a sub-30% efficiency ratio, asset quality, our various asset quality ratios, our expectations for net charge-offs and our net charge-off ratios, our allowance for loan and…

Thank you, Susan, and thank you all for joining our call today. In our 18-plus years as a public company, we have reported many great quarters and many great years, but we believe our work in 2015 and particularly the fourth quarter of 2015 is by far our best yet. Of course, the year and the quarter just ended were notable for many record-breaking financial results, which Greg and Tyler will discuss short, but we believe our work in 2015 will be best remembered for how well we prepared and positioned ourselves for even greater achievement in 2016 and future years. In today's call, we hope to give you clear insights and both of these very important elements our team's accomplishments in 2015, both the outstanding financial results and the highly strategic preparation for our future. Let me start with a quick summary of financial highlights. Our fourth quarter net income of $51.5 million was a quarterly record, providing a strong finish to our most profitable year ever. In fact, our record annual 2015 net income of $182.3 million was a stellar 53.7% increase over the previous record annual results in 2014. During the quarter and year just ended, we achieved both, quarterly and annual records for a large number of measures, including diluted earnings per common share, growth in funded non-purchased loans and leases, growth in closed and unfunded loans, net interest income, service charge income and trust income. Additionally, we ended the year with some of our best asset quality ratios as a public company, including our best past due ratio for non-purchased loans and leases. Of course, 2015 was another and a long string of excellent years as evidenced by the fact that our 2015 return on average assets of 2.11% continued our exceptional record of having…

Net interest income is traditionally our large source of revenue as a function of both, the volume of average earning assets and net interest margin. Our fourth quarter 2015 net interest income was a record $106.5 million and our full-year 2015 net interest income was a record $382.2 million. We enjoyed a very positive trend in net interest income in each quarter of 2015, 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 $1.08 billion. This growth was $400 million more than our previous quarterly growth record achieved in the third quarter of 2015. Our unfunded balance of closed loans also increased by a record amount $939 million during the quarter just ended and at December 31, 2015 was a record $5.8 billion. While some portion of this unfunded balance will not ultimately be advanced, we expect the majority will be advanced. This has favorable implications for future growth in loans and leases. Our growth in non-purchased loans and leases accelerated over the course of 2015 from $331 million in the first quarter of 2015, $456 million to $680 million, and finally $1.08 billion in the fourth-quarter resulting in record non-purchased loan and lease growth for the full year of 2015 of $2.55 billion. In our October conference call, we introduced guidance for full-year 2016 growth in the purchased loans and leases of at least $2.5 billion. Based on growth in our customer base, our pipeline of transactions currently in underwriting and closed link and as previously discussed, our largest ever unfunded balance of closed loans, we are raising our 2016 growth guidance.…

Traditionally, we had been among the most efficient bank holding companies in the U.S. 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 37.1%. For the full-year of 2015, our efficiency ratio improved to 38.4% 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 have 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 utilized a large amount of the current excess capacity of our extensive branch network. Our expectation that our core software conversion improvement projects over the past two years will provide greater functionality for our customers, employees creating opportunities for enhanced operational efficiency, our expectation of achieving additional productivity gains by reallocating resources from stabilize properties group and a few underperforming community banking elements to more productive geographies and areas of business and our expectation that we will achieve significant efficiencies from our pending acquisitions, including efficiencies from the adoption of Community & Southern Bank's consumer lending platform and the deployment of numerous technology applications from C1 Bank's, C1 Labs innovation group. We are hopeful by fully leveraging these factors among others; we can achieve our goal of a sub-30% efficiency ratio over the next several years. Our efficiency ratio results for both, the fourth quarter and full-year of 2015 were significantly impacted by unusual items of non-interest income and non-interest expense. During the quarter just ended, we incurred $6.4 million in penalties from…

We have traditionally reminded listeners in the January call that our first-quarter results are often affected by numerous seasonal factors. For example, lower post holidays consumer transaction volume typically results in lower service charge income. Home sales are often lower in the first quarter, resulting in less mortgage income, business disruptions due to winter whether are not uncommon and our annual premium increase for health insurance and a majority of our salary increases-type effect in the first quarter. You should consider these seasonal factors in establishing your quarter-to-quarter estimates for 2016, which we expect to be another record-breaking year for Bank of the Ozarks. That concludes our prepared remarks. At this time, we will entertain questions. Let me ask our operator to once again remind our listeners how to queue in for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from Michael Rose with Raymond James.

Hey, good morning guys. How are you?

Hey, doing great, Michael. Good morning.

Good morning. Just a couple of quick questions, maybe we can just start off with the housekeeping question. The severance cost, if we are looking to kind of back that out the run rate should we back that out of salaries and employee benefits or should we back it out of other operating costs?

Salaries and employee benefits.

Okay. That gets to my second question, which is you know what kind of drove the big sequential decline in that line item this quarter?

In part was the staff reductions, our total FTE headcount at 12/31/2015 was 1,641 employees, compared to 1,653 employees at September 30. In addition, we had a lower accrual for our performance-based bonuses. We have been occurring over the course the year assuming that we were going to get 100% of those bonus targets, we did not achieve maximum performance objectives and one of the criteria for the bonuses, so that resulted in our earned bonuses being 94% of the maximum and we had lower accrual in Q4 as a result of that.

Okay. That is helpful. Then if I can dig into kind of the loan growth outlook for the year, obviously, you raised a decent amount, pipeline looked good. George, can you talk a little bit about the deals that you put on the books now and kind of those leverage levels you are using and have you started to do larger deals, because you now exceeded the loan growth and the pipeline for nine consecutive quarter, so just may I get a sense if you are moving upstream or if you are just seeing a lot more deal activity?

Yes and yes, on both respects. Every year, we have increased the size range of transactions that we are doing, because our balance sheet is growing and capital account is growing and that has allowed us to look at larger transactions, so that has been helpful. Yes, we are, as Greg alluded to in his comments, adding new customers and in some cases very substantial new customers that we have never done business with before getting substantial volume buyer and we are getting increased deal flow from existing customer. The growth is coming from a variety of sources, which is very encouraging, very pleasing to us. I think the reason that were getting this growth from so many different front is that our reputation for being able to execute in a very effective and timely manner for our customers is growing, the market is becoming more aware of that and that is, I believe, making us the lender of choice for many customers for their commercial real estate transactions. Our expertise and execution is definitely paying dividends for us.

Okay. Great. Just one more for me. I know you gave some of the pieces, but I do not think you actually kind of gave an initial NIM outlook for the year. Would you care to comment on that?

I would be happy to comment on that. We did not give a NIM outlook on that and there are a variety of reasons for that. One is, and I think part of the guidance that Tyler gave on the cost of interest-bearing deposits was predicated upon two Fed rate increases is what Tyler is modeling or Greg is modeling on the deposit cost side, but frankly with the volatility in economy, I do not know whether we have zero Fed rate increases or four Fed rate increases next year. If it is one, two or three, so there is considerable uncertainty in our minds about how that plays out. The rest of you guys might have it all figured out. If you do, please send me an email giving me the answer, but we are confused about that. Then the magnitude of our growth over the course of next year, we are working with a fairly wide range of outcomes there that start with $3 billion minimum growth in non-purchased loans and lease. Then the two very substantial acquisitions, you know, the CSB and C1 deal have total assets of $6 million adding to our $10 billion, almost, balance sheet and the until we actually do our final market pricing on those loans, valuations almost loans, we won't know exactly what the yields of those portfolios are, so there are so many variables at play there that we elected to not try to give precise guidance.

Understood. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from Jennifer Demba with SunTrust.

Good morning, Jennifer.

Thank you. Good morning George. I wonder if you could get your specific thoughts on the commercial real estate cycle and where you think we are in that cycle at this point. I think that during the last earnings call in October, you said we could be coming towards the end, but you did not have any real conviction, I do not think on that point of view. Can you just kind of give us some more color?

Well, the hazard of making statements like that is sometimes they get interpreted differently than you intended. I think, exactly what I said was not and we were coming to the end or could be coming to end of the real estate cycle, but that we may be in the later stages of the real estate cycle. What I can tell you is that we are saying tremendous transaction volume. We are underwriting that transaction volume very thoroughly and very carefully. We are paying tremendous attention to the economics and competitive market data on every significant transaction we are doing and the transactions we are doing, we believe, have exceptional economic viability. If we did not think the supply demand metrics in particular markets justified particular projects we certainly would not be approving them and we are being very conservative about that, because there is a lot of turbulence and uncertainty about the economy and where we are in real estate cycle, so caution is merited, really extreme caution is merited, I think, given the uncertainty about the economy globally and nationally. We are doing things that make sense, and as I said in my prepared remarks, our focus for several years has been trying to find the best projects in a massive universe of projects that are getting done out there. Focus on the best sponsors, and by that I mean sponsors that have significant proven capability to manage developments and not to only produce them, but to manage them through a variety of cycles and sponsors that have very strong balance sheets and very strong liquidity. Then to be very low leverage in these transactions and I know some lenders trying to grasp yield are going to higher leverage. We are going the opposite direction and willing to…

I have one follow-up. Has the competitive landscape for lending in these projects, has it changed at all in the last three or six months?

Not in any material sense. I mean, there is a continuous ebb and flow of competitors in and out and what different folks are thinking at different times, but there has not been any material change in that landscape.

Thanks so much for the color.

All right. Thank you.

Thank you. Our next question comes from Matt Olney with Stephens.

Hi. Thanks. Good morning guys.

Good morning, Matt.

Given the uncertainty of the national economy that you keep ringing up, I am curious, which markets today you feel still have strong fundamentals that will allow you to continue some growth, and within closed, but unfunded balance, any commentary you can give us as far as the mix by geography?

Well, the mix by geography is gravitating more toward New York and California. I have not seen the data yet, but my guess is that New York probably jumped over Arkansas in the total geographic distribution of loans a 12/31, you know at September 30, Arkansas was $1.28 billion of funded loans and New York was about $100 million less at $1.174 billion, and I would guess those numbers flipped over in the quarter just ended. I would guess that California, which I think was sixth or seventh on August 5th among our states and loans possibly pushed up into the fourth positioned, surpassingly the Carolina. Clearly, the economies of Metro New York City area and a number of the California MSIs are very vibrant a lot of things are going on. There are a number of other very good economies. We continue to see good activity in the Dallas area. Austin is another good economy; Denver is a very good economy, Seattle another very good economy, so there are a lot of markets that are enjoying very favorable economic results this period of time. As I said in response to Jennifer's question, we are very thoroughly underwriting and stress-testing supply demand metrics; rental rate metric, sales metrics in all of these markets where we are doing business and I should also probably fill [ph] Florida in there is a state where we are seeing a lot of activity.

Okay. That is helpful, George. As a follow-up, I am curious on your updated thoughts on capital. Obviously, you raised the capital in December, and it looks like you deployed a pretty good chunk of that during the fourth quarter, so I am curious kind of what the scenarios are, what we could see additional actions to the bolster Tier 1 or Tier 2 capital sometime in 2016.

Yes. Our calculation is that we have still got somewhere around one $1.3 billion, $1.4 billion of growth capacity in our balance sheet with existing capital as of December 31, and that of course is based on the fully phased in January 1, 2019, Basel III capital standards, including the capital conservation buffer, so fully-phased and with the buffer we have still got one $1.3 billion to $1.4 billion of growth capacity. Our needs for additional capital in the future will be guided by the same factors that drove our decision last time and that is are we going to see another acceleration in loan growth that would utilize that capital cushion that we have now and get us closer to our standards and you know we won't get all the way down to our standards before we would take action to make sure we maintain plenty of capital. The capital issuance we did in Q4 was heavily debated internally within our company. There was a camp of our officers that felt that that would be a better choice, a camp that thought that equity would be the preferred choice common equity and after some discussion, we elected to do the capital raise through common equity, because we felt like we were getting very good execution on the transaction. I would guess that with that done, the next time we need to tap capital markets that you would probably see that done with Tier 2 capital in the form of subordinated debt is the most likely thinking on that here, but we have no precise time, sort of plans for that and again that creation of additional capital would be dependent and the choices of means for that would be dependent upon the circumstances at that time, sounding like the Fed, we are data-dependent down here, but that is our current thinking on that subject.

Okay. Thank you, George.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Joe Gladue with Merion Capital Group.

Good morning, George.

Hi. Good morning, Joe.

Let me follow-up a little bit on I think the geography question. I guess on the last conference call, you mentioned that you still weren't seeing a whole lot of stresses in Texas markets, just wondering if you would update if anything changed.

Well, that that continues to be the case. Obviously, the market in Texas, where we have some substantial business that would probably be the most interesting to talk about is Houston. I actually was on the phone with our RESG guy in Houston and our South Texas the Community Bank division President in the last couple of days just asking about specific loans and progress and leasing and sales and so forth on specific assets we have in the market and then getting a general update on market conditions and I am very pleased to report that, as we reported last quarter, we are really not seen any stress in our portfolio down there as a result of the old and gas price declines and the impact that that is having in a variety of markets. The good news about our portfolio there is, predicated in large part on the fact that we really have no meaningful direct exposure to oil and gas to either exploration or development companies or oil service companies. Just no meaningful direct amounts at all, nor do we have a significant indirect to exposure in form of those guys being tenants and buildings that we have the financing on and so forth, so our exposure to the oil and gas economy is really at the macro level. How is that just affecting the general demand for apartments, condos, office, retail space and affected markets including Houston, and you know the interesting thing about Houston, I mean certainly there has been a lot of the oil and gas industry layoffs there in the last year and no doubt there will continue to be some given where oil and gas prices are when I left the house to come to work this morning. I think WTI broken…

Okay. Thank you. Just one other question, the estimate on the impact of the Durbin Amendment, the $5.35 million, I just wanted to make sure that would include any impact on the two revenues of two pending acquisitions. Does it?

No. It does not include that, so to the extent we get additional benefits from that that number would be bigger.

Yes. Okay. Thank you. That is it for me.

All right.

Thank you. Our next question comes from Brian Martin with FIG Partners. Please go ahead.

Good morning.

Hi. Good morning, Brian.

Hey, George, can you just talk about the $1 billion in growth this quarter just kind of the breakout by your, I guess your five or six growth buckets there, just the real estate specialties and whatnot?

Well, clearly Dan Thomas, runs real estate specialties group for us and of course our Chairman of the Board. Dan and his team were the lion's share of that growth. I do not actually have the breakdowns, but community banking contributed a pretty nice number. I think they were a $100 million-plus of the growth in the quarter. Again, I have seen those numbers, but I have seen a lot of numbers since I saw them, so I could [ph] out from that, but I think they were $100 million-plus, but clearly the lion share of it was real estate specialties group. It was sort of broad-based across product types. Our residential 1 to 4 family loans actually went up about $23 million. Our CRE loans went up about $202 million. Our construction and land development loans went up about $402 million, Agra [ph] credits went up $20 million, multi-family went up about $143 million, CNI dropped about $20 million, consumer and leasing were pretty much unchanged and other loans went up about $315 million or so. It is a pretty broad-based contributions based on product type and different units in the company.

Okay. Then just the seasonality you mentioned as far as first quarter. I guess, in the past I guess it seems like you guys had the seasonality in the loan side and then more recently it sounded as though that was less likely. Does that seasonality comment also apply to the loan growth in the first quarter? You still expect that to be on a little lower than the other quarters?

Well, I appreciate you are listening closely and noted, but I omitted the loan volume from the seasonality factors, and the reason that I did that obviously with this massive is probably not an overstatement, volume of loans that we have got close that are not funded which is what Greg, $5.8 million now. Those loans are going to fund on a predictable manner and they are already closed and they are in the pipeline. Now, I think there will be some seasonal impacts, and part of that is people who do large transactions and complex transaction tend to takeoff at the end of the year, so there is always a bit of a law to some degree in the pipeline of new deals that flow in because everybody send you everything they have got before they go on Thanksgiving or Christmas or New Year's vacation and then you have a little lull of the few weeks after they come back to work before they get their next deals skewed up, so there is an element of that that affects closings and initial funding on loans. Then to the extent that adverse winter weather affects loans in certain market, so you have weather conditions that affect the progress of construction that will slow your construction branches, so I say all that I think the bottom-line is, there will still be some seasonal impacts on loan volume, but because of the significant volume of closed unfunded loans that have been closed over the last six quarters that are funding up that seasonal impact will be more muted than in past years, where we had a lower volume of closed unfunded loans that we were funding up about. It is still some part of the factor I think less than in the past.

Perfect. Thank you for that. Then just maybe you talked about the reallocation from the stabilized property group to other areas. Can you point any was that market or just areas you are focused on as far as that reallocation goes?

Yes. We are looking to increase our RESG staff in New York simply because the RESG staff has been much more effective in producing quality volume and meeting our standards and stabilized property group has. We are also expecting next month to open a RESG office in San Francisco. We are looking at other staff additions two RESG and existing offices and we are making some community bank addition in Charlotte and certain other markets, where we believe that there is a significant opportunities for growth. It is just a look that we took to determine who was not producing to our standards on volume, quality and price and could we either remedy that insufficiency or did we need to lose those resources and redeploy those resources into markets and products business segments, where we felt like we could achieve much greater productivity.

Okay.

I would view myself as a coach of a professional team and my annual aspiration is to win the national championship. If I have got, since it is basketball season, now if I have got a guys that has given me eight points game and 12 minutes of playing time, I think and that is not what I need. I need 12 points from that guy in 12 minutes of playing time and I need better defense at the same time and more hustle and better attitude then you have got to make the player trade that you need to make to put a championship team on a championship course. Some of the changes we made were wonderful individuals who are working really hard and trying to do a good job. They just were not getting the ball into the basket for us. We have got to have guys that perform at a high level if we are going to put up the high level resource that you guys expect.

Perfect. Okay. Just the last thing, maybe one for Greg on the tax rate if you just give any sense on that and then maybe just one last one George. You have talked in the past or I guess just kind of the regulatory kind of guideline, if you will, on commercial real estate concentrations maybe not being I guess a big issue given the diversity within your book, I guess. Does that still hold or you are taking any closer look at the concentration at commercial real estate or just any thoughts on that would be helpful.

We continue to believe that conservatism with which we underwrite commercial real estate loans. The very low leverage based on a loan to cost and loan to value basis that we do that. The diversification of the portfolio across a number of geographies really 41 states, the diversification of the portfolio by product type across all of those geographies and the intent servicing that we do assets post closing, so that we are monitoring and managing those assets on a ongoing continuous basis farther on the books. We believe that the strength of that whole credit culture and process is such that it gives our regulators substantial comfort that our portfolio is much less risky than the average banks' CRE portfolio and that gives us a fair degree of latitude. We understand that continue to enjoy that privilege means we have got to continue to be very conservative, we have got to continue to be very expert, we have got to continue to underwrite with extreme attention to detail, we have got to continue to close and document, we have got to continue to service these loans with extreme attention to detail and make sure that that we know what we are doing and how they are going to work out, hence the focus on best projects, best sponsors, low leverage transaction. All of that is just part of an overall holistic culture that gives us comfort and I think gives our regulators and obviously our shareholders comfort that we have a lot of expertise in what we are doing in and we are going to do it in a very safe and defensive manner. Greg, you want to comment on the tax right.

Yes. I will be brief Brian, but I mean if you look the tax rate, the biggest drivers may change that would be really in the tax exempt income, primarily the municipal bonds we got and those earnings are tax exempt. With the shrinkage of that municipal bond portfolio as a percent of our total assets just mainly drove the significant growth in our loan portfolio much greater percentage of our asset base and our earnings on those assets is taxable today than I might have been two, three, four or five quarters ago. As long as that is the case, the tax rate probably will be at or have a tendency to work its way up just slightly over the course of '16. On the flipside, if opportunities present themselves in the bond market if we were to further leverage our balance sheet and add new [ph] both of those types of transactions would have the tendency to mitigate any increase or potentially allow that tax rate to work its way down just slightly. I do not see a lot of movement in the rate as we move into the 2016, but again to the extent that we see opportunities, either to substantially grow our balance sheet opportunities within the municipal bond market or both, transactions those would certainly have some impact on our tax rate on a go forward basis.

Greg, you thought is that the balance is just slightly up…

Slightly upward. That is correct. Yes.

Slightly upward from the fourth quarter, Greg, or just in the annual number?

Most of the annual number, fourth quarter number to those probably a less so than on the fourth quarter number, but yes up on both.

Okay. Thanks very much.

Thank you, Brian.

Thank you. I see no further questions at this time.

All right, thank you very much. We appreciate you joining the call. There being no further questions, we will conclude the call. We look forward to talking with you again in about 90 days. Have a good day. Thank you.