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Bank of the Ozarks (NASDAQ:OZK)
Q1 2018 Earnings Conference Call
April 12, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please stand by. Your conference call will begin momentarily. Once again, thank you for your patience and please stand by.

Good day, ladies and gentlemen, and welcome to the Bank of the Ozarks' First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, you may press "*0" on your touchtone telephone to speak with an operator. And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Tim Hicks. Sir, you may begin.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Good morning. I am Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bank of the Ozarks. Thank you for joining our call this morning and participating in our question-and-answer session. As discussed last quarter, we made what we hope is a significant enhancement to our earnings release process by publishing management comments with our earnings press release earlier this morning. These comments are available on the Investor Relations section of our website.

In today's Q&A discussion, we may make forward-looking statements about our expectations, estimates, and outlook for the future. Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements.

Joining me on the call to take your questions are: George Gleason, Chairman and CEO; Greg McKinney, Chief Financial Officer and Chief Accounting Officer; and Tyler Vance, Chief Operating Officer and Chief Banking Officer. We are very pleased to report our excellent first quarter results and we'll begin by opening up the lines for your questions. Let me ask our operator, Sandra, to remind our listeners how to queue in for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press "*1" on your touchtone telephone. And if your question has been answered or you wish to remove yourself from the queue, please press "#". Also, to prevent any background noise, we do ask that you please place your line on mute once your question has been stated.

And our first question comes from the line of Ken Zerbe with Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good morning. Why don't we start off, just in terms of expenses. Obviously I saw your expense guidance for the rest of the year, that it's going to be lower than what it was in the first quarter. Can you just talk about some of the dynamics behind that? Like how much was first quarter expenses related to sort of unusual items? I'm thinking of sort of the unusual expenses, not the core infrastructure build-out. But then how much of that goes away? And how do you think about what you need to spend over the course of the year? Thanks.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Hey, Ken, Tim Hicks here. I'll start by answering that question. Obviously you saw our salaries and expense line increase $7 million on a linked quarter basis from fourth quarter. And you saw in our management comments that we discussed the deferral of some of those costs was lower this quarter. In accordance with FASB 91, we defer costs on loan originations. So as you saw in our management commentary, we did have lower originations this quarter so we had lower deferred costs. As you also noticed in our management commentary, we have net more deferred loan fees than net costs. So it's accretive to our margin going forward.

But if you looked at just that salary line that increased $7 million, roughly half of that was due to lower deferred costs and the other half was due to just normal increases in salaries and benefits that we typically see during the first quarter.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. Because I guess I'm just thinking the guidance is gonna be lower than where it was this quarter. I mean, obviously it's a positive. But just if we look back over the last year or two years or three years, we've seen such strong growth in expenses. I'm just trying to get my head around, aside from a couple million dollars of comp, what's driving much more of that dramatic slowdown in expenses versus what we've historically seen.

George Gleason -- Chairman and Chief Executive Officer

Ken. George Gleason here. Let me comment on that. We are, as we've talked about for a number of quarters now, nearing a point where the majority of this infrastructure build is complete. We will be continuing to add additional people to headcount in Q2 and, to a lesser extent, Q3 and Q4. But we believe that some of our consulting and other costs that have been involved in that buildout of infrastructure will be headed downward as the year progresses. So when you factor in continuing to add additional people and you factor out the declining expectations for expenditures on consulting and other costs over the course of the year and you assume a more normalized rate of deferral of costs related to a more normalized origination volume, we actually think that our non-interest expenses will be lower in future quarters than they were in Q1. And that's what our projections and that budget reflect.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Okay. No, I just wanted to make sure I understood. I think it's good. And that clarity helps, certainly. The second question I had, just in terms of, can you comment a little more broadly on the outlook for loan growth. Obviously I want you to address the decline that you saw in unfunded balances this quarter. But what are you seeing from a broader environment? Like why should that not keep going down? Thanks.

George Gleason -- Chairman and Chief Executive Officer

Ken, this is George Gleason. I'll address that. We had a lower than expected volume of originations, of new loans at RESG. Our fundings and so forth were very much in line with our expectations. That lower origination volume, we believe, is really just a temporary phenomenon. We had a number of transactions that we had expected and hoped to close in Q1 that have rolled into the month of April. There were specific reasons for each of those and none of them systemic or chronic issues. It's just a lot of sort of one-off issues that caused those transactions to rollover a few weeks. So we have expectations for a very good closing month in April and so forth.

So our expectation, to answer your first question on loan growth, is unchanged. We expect that our 2018 loan growth in non-purchase loans will exceed our 2017 year growth in non-purchase loans. We believe, as we said in the management comments, that that down trend in the unfunded balance of loans already closed that we saw in Q1 is not a trend. That that's just -- that number will move around from quarter to quarter. We expect that number will tend to move up over time and not down. So we certainly don't think that one quarter result is a trend.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Okay. Thank you very much. I appreciate it.

Operator

Thank you. And our next question comes from the line of Michael Rose with Raymond James. Your line is now open.

Michael Rose -- Raymond James & Associates -- Analyst

Hey, good morning, guys. How are you?

George Gleason -- Chairman and Chief Executive Officer

Hey. Good morning, Michael.

Michael Rose -- Raymond James & Associates -- Analyst

I have a question on capital. Earlier this week, the Fed put out a proposal as it relates to CCAR, moving the timeline for the amount of capital that you would need through a stress scenario to four quarters from nine quarters. And if that's passed, it's our belief that that could trickle down to the DFAST banks. And I know you guys have proactively raised some capital. So I wanted to get your thoughts on capital and if this would help. And then, B, given where your stock is, at any point, would a buyback make sense? Thanks.

George Gleason -- Chairman and Chief Executive Officer

Michael, this is George. Let me take that and then Tim may, since Tim works a lot on our capital issues, he will probably want to weigh in on that as well. No. 1, I would tell you we appreciate the fact that the regulators are looking at capital and the leadership at the Federal Reserve have been looking at that. We have not had time, with other things we've had going on in the last couple of days, to look at either their first or their second proposal in any detail. So it would be premature to comment on the impact of those proposals and how that might filter down to us.

In regard to a stock buyback, we have got a tremendous history of growing our balance sheet. We've raised capital with the expectation that we will need that capital for future growth. We continue to be very positive on our growth trajectory. You noticed, I think, in Tim's management comment that our trailing four quarters' growth in non-purchase loans is, I think, 33.8%. Tim, is that right?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

That's correct.

George Gleason -- Chairman and Chief Executive Officer

So we would expect that our forward growth and earning assets, particularly non-purchase loans, to a lesser extent, securities, would ultimately utilize all of the capital that we've got. And we're excited about that because we believe that's very good for shareholders.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yeah, Michael, this is Tim. What I would add to that is what I saw in that proposed rule was also a static environment, where you took out growth. Obviously when we talked about raising capital last year, it was because of our expectations for robust growth. So if the rules would allow us to have a static review of that, that obviously would be very beneficial. But I think it's too soon to tell at this point. Obviously it's addressed to CCAR banks and I would imagine that would trickle down to DFAST as well. Obviously there's things in Senate Bill 2155 that would be positive as well. So we're watching that very closely and all of that is very positive.

Michael Rose -- Raymond James & Associates -- Analyst

Okay. Maybe as a follow-up, just back to Ken's question on expenses, I noticed that you guys are winding down the mortgage business. Can you give us a sense for what would come out related to that in terms of expenses?

George Gleason -- Chairman and Chief Executive Officer

Most of that is out in Q1. There's some small, incremental amount. And the same on the small ticket leasing business that we started winding down in Q4. Most of that is out. So there's a little bit more of an efficiency gain but it's not a meaningful number. And whatever savings there are in that regard will be offset or more than offset with the addition of people in other lines of business where we're having significant growth.

Michael Rose -- Raymond James & Associates -- Analyst

Okay. That's helpful. Maybe one more for me for Tyler. Any update on the spin-up campaigns and kind of where we stand and just any thoughts on general deposit environment would be helpful. Thanks.

Tyler Vance -- Chief Operating Officer and Chief Banking Officer

Sure, Michael. Happy to take that. Q1 spin-up was a very nice contributor to our deposit growth. You noted in our management comments that was $641 million. Figure 21 on Page 23 gives some more metrics related to that. That included organic growth of $654 million and another quarter in a string of quarters where we paid down broker deposits. Those decreased about $13 million. The non-spin-up offices contributed very nicely. And you'll note also in our management comments that net checking was about $7,500.00 in Q1. So that's an excellent start to the year. We're proud of that number.

Currently, related to spin-up, we have 33 offices in 22 different markets. You'll note that's down some from Q4 and the beginning of Q1. We've needed a little less spin-up recently, given our strong performance in the New York office. Now, that was a little less in Q1. The New York office grew about $57 million but that follows a year of growth last year of $1.4 billion. And our expectation for that deposit-gathering team is that they would have another significant contribution to our growth this year. They have some very nice deposits in their pipeline. So excited about that as well.

In terms of just competition for deposits, we did refresh some spin-up special offerings after the Fed move and really in response to some additional promotional rate offerings we're seeing competitors put into the market. Our CD specials in those 33 offices that I mentioned range now from 11 to 15 months and those APYs are anywhere from a 1.80% to a 2.11% APY. Those are competitive offerings. They're not always the best offering in those markets. We've seen competition, as I mentioned, in promotional offerings increasing recently. But we still think spin-up will be a nice contributor to our growth this year.

Michael Rose -- Raymond James & Associates -- Analyst

Hey, guys, thanks for taking my questions.

George Gleason -- Chairman and Chief Executive Officer

Michael, I might add on that, our core spread increased, I think, 9 basis points in Q3 and 9 basis points in Q4 of last year and increased 4 basis points in Q1. And Tyler and the deposit team had been very disciplined in trying to hold the line on deposit costs in Q3 and Q4. So there was a little bit of a snapback effect to that, we think, in Q1, where we had to push a little bit more. But we still had a 4 basis point positive difference between our increasing yield on non-purchase loans and our cost of interest-bearing deposits. So we thought that was a very good outcome and Tyler and his team did a real good job managing that cost of deposits, given the growth we achieved over a multi-quarter period of time there.

Michael Rose -- Raymond James & Associates -- Analyst

Thanks, guys.

Operator

Thank you. And our next question comes from the line of Jennifer Demba with SunTrust. Your line is now open.

George Gleason -- Chairman and Chief Executive Officer

Good morning, Jennifer.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Hi, George. You said some of your loans on RESG slid into the second quarter. Just curious what you saw in paydown activity this quarter versus maybe third and fourth quarter of last year.

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer

Let's see if I can give you that. On the -- Tim, is this data all or is this just RESG?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

That's just RESG.

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer

Okay. Yeah. I think our repayments were about $800 million in round numbers on RESG for the quarter. Obviously we had $525 million-plus in net funding so we had gross advances of about $1.325 billion. Again, round numbers on that for RESG.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Okay. And how does that compare to the last couple of quarters?

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer

It's in the middle. We've had quarters where there were more and less in each of those metrics over the last, say, six or seven, eight quarters.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

And, George, you said earlier that you think you're kind of nearing the -- or you're in the late innings of the infrastructure build. What do you think is kind of a normalized expense growth level for you guys, given the level of loan and revenue growth you like to have?

George Gleason -- Chairman and Chief Executive Officer

Jennifer, I don't know that we're prepared to give you a comment on that. I think we would leave that with the comments in our prepared management comments, which suggest that, No. 1, we think non-interest expense in the remaining three quarters of this year will be less than non-interest expense in the first quarter. And I've talked about the reasoning for that. And the biggest factor there is the fact we had a low level of deferred loan origination costs in Q1. And secondly, again pointing to the management comments, we expect that our efficiency ratio will improve over the course of 2018 and that, by the end of the year, for the full-year that efficiency ratio will be much closer to the 2017 efficiency ratio than what our first quarter results would indicate. So I think I'll leave it at that and we may have some run rate guidance in a future conference call that would apply to future years.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks so much.

Operator

Thank you. And our next question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is now open.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Hey, guys, good morning.

George Gleason -- Chairman and Chief Executive Officer

Good morning.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

So I wanted to follow up on the discussion on the unfunded commitments and kind of what maybe gives you confidence that that number will start to creep back higher in the coming quarters. And maybe, George, too, if you could talk a little bit about, you said you had maybe $525 million in net new fundings and $1.3 billion in loans that advanced on the unfunded commitment book. So is that a similar dynamic or did that unfunded book decline because a greater number than average of those came over to the funded side, if that makes sense?

George Gleason -- Chairman and Chief Executive Officer

No. As I said in response to Jennifer's question, our net funding number, our gross advance numbers, and our repayment numbers for Q1 were very much sort of in the middle of the pack of where those numbers have been over the last six, seven, eight quarters. So there was nothing unusual about that. We just had a number of closings that slid from Q1 to Q2. And I as I said, those were -- there was not any sort of systemic reason for that. It was a lot of different one-off issues that delayed things 15 to 45 days. So we think we'll be back on track and I would expect to see a generally positive trend in the unfunded balance of closed loans for the remainder of this year and in future years. We expect that balance will grow. Obviously, as we saw in the first quarter, there'll be anomalous factors that would cause it to not grow in particular quarters, but we continue to think the trend is up.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Okay. But it's not necessarily gonna jump right back to growing $600 million to $700 million a quarter. Is that maybe a fair way to characterize it?

George Gleason -- Chairman and Chief Executive Officer

Well, I think that's just gonna be dependent upon how many loans we get closed in particular quarters and what the paydowns, curtailments, and other things. So.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Okay. That's fair.

George Gleason -- Chairman and Chief Executive Officer

And by curtailments, I really mean -- let me explain what I mean by curtailments. A lot of times, as we're getting to the end of a loan, it becomes clear that the sponsors are not going to spend all of the money budgeted in that loan for various reasons. And a lot of our loan documents allow us to curtail those commitments when we mutually agree that they're not going to be needed so that we don't have to hold capital for balances that are never funded.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Okay. That's helpful. That's helpful. And maybe talk a little bit about the marine and RV portfolio. It looks like it grew maybe $225 million this quarter. Is there a point where that portfolio starts to get too big or you kind of fill your appetite for those loans? Or do you still feel pretty good about continuing to grow that at a similar pace as well?

George Gleason -- Chairman and Chief Executive Officer

We feel very good about what those guys are doing. We're monitoring the quality of it very closely. We're having very low levels of past due and repossessions in that portfolio. But we're doing a pretty good forensic dive on things that do become past due and do result in repos to make sure that we're properly accounting for all factors that we ought to be accounting for in our underwriting of those credits. We've been able to get the yield up on those credits as rates have moved upward. So we're feeling very good about that portfolio and the job that our team is doing there.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Okay. Great. Maybe one last one for me. Just you mentioned the positive move in the core spread, which is great to see yet again. You also said, in quarters maybe where we don't get a rate hike, that that could be under more pressure. Could you maybe give us an idea of -- is that -- when there's no rate hike, is that maybe a flat core spread or do we actually see that decline? And maybe also, of that $640 million in deposit growth, how much of that came from the higher costs, like promotional spin-up stuff, and how much of that is maybe more, I don't know, true core, if you want to call it that?

George Gleason -- Chairman and Chief Executive Officer

I don't know that we can give you that but I tell you what I would point you to. Tim, where is that?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Core spread graph? It's on Page 12.

George Gleason -- Chairman and Chief Executive Officer

Hold on just a second. Yeah. If you look at Page 12 of the management comments, I think this graph, this data tells you a lot. You can see over the last seven quarters, which is really from the second through the most recent sixth Fed rate increase, that core spread has improved 42 basis points over that period of time. Clearly we're benefiting from a rising rate environment. If you go back and look at a similar time period from Q1 of '14 through, say, Q4 of '15, that spread declined 28 basis points when we were in an environment where the Fed was essentially on hold and we were near zero on the Fed Funds Target Rate. So I think if we enter into an extended period where the Fed is on hold and the Fed Funds Target Rate is stable, that would be an environment that would tend to, as reflected in that part of the data in that graph, I think that would tend to put some pressure on our net interest margin. Obviously as long as the Fed is moving upward, we think that tends to help us improve our core spread, which tends to support our net interest margin.

I would also take you to Page 10 of management comments, Stephen, and if you look at the net interest margin on the page there, our net interest margin in Q4 was 472. Our net interest margin in Q1 was 469. Almost that entire difference is a result of the lower tax equivalent yield on tax-exempt securities resulting from the lower tax rates. If we had had in the first quarter the tax rates applicable in the fourth quarter of last year, our net interest margin would have rounded to 472. So we would have had an essentially flat NIM, a fraction of 1 basis point downtrend there, I believe. We would have essentially a flat NIM if we had the same tax rates. So that suggests to us that the work we're doing on the core spread and the good job that Tyler is doing managing the increases in our deposit costs as we grow deposits and deal with a rising rate environment are beginning to have a nice impact on the attrition in that spread.

I would also point out to you the data on Page 8, which is the graph that shows our yield on non-purchase loans and our yield on purchase loans. And we've made a lot over the years about the fact that, as our higher yielding purchased loan portfolio runs off, that tends to put a downward impact on our margin. And as you can see from that graph, our non-purchase loan yields are not quite yet at the same level as our purchase loan yields but they're a lot closer than they were a year or two years ago. And that convergence in those yields, which we think will likely continue. Now, there'll be erratic movements from quarter to quarter, but we think that convergence will likely continue. And that has positive implications for our net interest margin going forward.

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Definitely. Definitely. Thanks for the color, George, and congrats on another good quarter and the recent recognition for the bank. I appreciate the time.

George Gleason -- Chairman and Chief Executive Officer

Thank you, Stephen.

Operator

Thank you. And our next question comes from the line of Matt Olney with Stephens. Your line is now open.

Matthew Olney -- Stephens Inc. -- Analyst

Hey, thanks. Good morning. I wanted to go back to the core spread discussion. And I'm curious on what your thoughts are from here. You mentioned there was the 4 basis point expansion in the first quarter compared to the 9 basis point expansion in late 2017. And if we assume that the Fed continues to march up interest rates, is this a good way to think about the range of this expansion the next few quarters, somewhere in that 4 to 9 basis point range? Or are you more toward the lower end of that given the recent trend?

George Gleason -- Chairman and Chief Executive Officer

Well, Matt, if you look, again, at Page 12, that little green box at the bottom of that chart, as the Fed has raised rates, we've had a couple of quarters where we were 9 basis points in improving core spread. We've had one quarter where we were 0 basis points in improving core spread. If you look at that, the cumulative of that is 42 basis points of improving spread over, Tim, seven quarters?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Mm-hmm.

George Gleason -- Chairman and Chief Executive Officer

So the average is about 6 basis points. And it's hard to know how all of the dynamics and moving parts play out but we would hope that we would be plus or minus a little bit around that average as we go forward, as long as the Fed is continuing to increase the Fed Funds Target Rate. Which based on recent comments and transcripts of their conversations and so forth on that subject seem to suggest they are inclined to continue to do so.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. And then on the leasing division, I think we talked last quarter about you restructuring your division. I think you're keeping parts of the business aviation group. Any update you can provide on that group and when would you expect that group to contribute more meaningfully to the positive overall loan growth?

George Gleason -- Chairman and Chief Executive Officer

Well, the business aviation group has been moved over from our old leasing division to the community banking group. We feel very positively inclined toward that group and think they will be a source of positive growth. It will not be a huge line item for us but it's one of many contributors to growth in our community banking division. I think the more important part of that story in the short run for this year and next is the small ticket part of that portfolio that was about $97 million, I believe, when we started working our way out of that, was about $80 million at the end of the last quarter. And that portfolio has contributed a disproportionately large percentage of our losses the last few years. We've had so little losses, nobody's asked about the composition of them but I think our net charge-off ratio in the first quarter was 4 basis points. But annualized, which is almost nothing, but most of that almost nothing number came from that portfolio. So that portfolio winding off really quickly and we think that's a positive factor.

Matthew Olney -- Stephens Inc. -- Analyst

Okay. Thank you.

George Gleason -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Catherine Mealor with KBW. Your line is now open.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thanks. Good morning.

George Gleason -- Chairman and Chief Executive Officer

Morning, Catherine.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

One follow-up on the margin discussion. We've talked about how the LIBOR impact had a positive impact on your asset data this quarter. I guess Question 1 on that is, just remind us, how much of your variable portfolio is tied directly to LIBOR versus prime? And then secondly, can you talk a little bit about the competitive dynamics that you've seen year-to-date on pricing? I mean, clearly you're benefiting from the increases in Fed Funds and LIBOR but have you seen any kind of tightening on credit spreads and pricing, outside of just rates moving higher?

George Gleason -- Chairman and Chief Executive Officer

Of course, competition is always a huge factor for us, Catherine, as you know and as you and I have discussed a number of times. We did see a very competitive environment in Q1, which is not surprising. And that's not surprising because the Fed's been moving quite a rate. The tax rates moved. And also a lot of our competitors get annual allocations of budget for them to loan out. So you typically, in the first quarter, see a lot of exuberance and aggressiveness from your competitors in getting started on their New Year's allocation for loans. And as they fill up that bucket, a lot of times you see that aggressiveness diminish over the course of the year. And I think that's one of the reasons that we've traditionally had exceptional loan growth in Q4 of each year, as a lot of our competitors have filled their budget, earned their bonus, and gone to the sidelines by Q4, and it lets us be even more rational and prudent in what we do.

So it's hard to know how all that competition that we saw in Q1 really translates out over the course of the year. I think that does tend to normalize and rationalize as we go through the year. But clearly it's a very competitive environment. What we have to do, and have always done in a very competitive environment, is keep our focus on our priorities. And priority No. 1 is asset quality. So giving on credit terms or getting competitive on credit terms is really a non-negotiable thing for us. We protect credit quality as our paramount mission. Secondly, it's to maintain profitability. And we will make adjustments to our pricing as we think are appropriate based on return on equity and so forth and you have a little room to move. But you don't have a ton of room to move and still meet our profitability standards. And then growth is the tertiary consideration.

So if we're faced with a situation where we have to give on credit quality to achieve growth, we're not gonna do it. If we're faced on a situation where we're gonna have to give on pricing to achieve growth, we're only gonna do it if we can still achieve our target minimum return on equity numbers. So you've just got to be disciplined and continue to execute well. I think the one thing that really helps us is that our ability to execute for our customers, and the confidence that our customers have in us being able to deliver what we'll say we'll deliver and to execute with excellence in the transactions, gets us paid more than our competition in many, many transactions.

So we're relying on the reputation, the relationship, our execution and expertise, our discipline to continue to maintain our credit quality and our profit margins in whatever sort of competitive environment we're in. Tim can answer the question on LIBOR. I've taken enough time to answer your second question that he has the data now on your first question.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thank you.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Hey, Catherine. You were asking about variable rate loans and how many were in LIBOR. So 79% of our non-purchase loans are variable and 83% of those are either based on one-, three-, or six-month LIBOR. The vast majority of those are based on one-month LIBOR. Don't forget that we do have 42% of our purchase loans that are variable. Those are roughly half and half between LIBOR and something else. So if you looked at our total loan portfolio, it's actually 79% of our total loan portfolio is based on either one-, three-, or six-month LIBOR.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. That's super helpful. And then one follow-up on the expenses. Can you -- I know you mentioned that about half of the $7 million increase in salaries came from the FASB 91, new deferral of loan costs. Is there a way to quantify what that typically is on a quarterly basis?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

It's gonna vary from quarter to quarter, just based on what George indicated in our originations in any particular quarter. I don't have the numbers in front of me that would suggest what it was over the last several quarters. But if you just linked it to fourth quarter, it was roughly half of that change was from that.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Is it typically a percentage of originations? Or what's the kind of way to think about modeling it?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yeah. I mean, our accounting guys look at it every quarter and they do have a percentage that they come up with every quarter and it varies on a lot of different factors.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay.

Tyler Vance -- Chief Operating Officer and Chief Banking Officer

Actually there's a fixed element of it and there's a variable piece of it that's consistent with the requirements under FASB 91. So every loan has a fixed component, depending on the loan type, as well as a variable component. The variable component is based on size. And to Tim's point, that does move around. We look at that. We do a detailed review of that annually and then quarterly, we do updates. Some of those quarterly updates are more extensive than others depending on what we're seeing in changes in projections, talks, pipelines, trends. But that is, to Tim's point, about half of that increase in the salary line was directly attributable to lower closings and the fact that we had fewer cost deferrals in the first quarter relative to what that has been running over the last three, four, five, six quarters. So.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Got it. Okay. Great. Thank you.

Operator

Thank you. And our next question comes from the line of Blair Brantley with Brean Capital. Your line is now open.

Blair Brantley -- Brean Capital, LLC -- Analyst

Good morning, everyone. Just had a quick question on the purchase loan yields. Were there any prepayment benefits this quarter?

George Gleason -- Chairman and Chief Executive Officer

There are always prepayment benefits and minimum interest benefits in any quarter.

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yeah, Blair, this is Tim. The number you may be looking for that we often get asked is how much additional accretion income we had this quarter. It was $12.7 million in Q1. I think that was roughly $14 million in Q4. But as George said, we always have some prepayment activity in the quarter. But that number should give you a sense of the accretion income impact.

Blair Brantley -- Brean Capital, LLC -- Analyst

Okay. And then, I mean, I know this is probably a hard question to answer. But in terms of convergence with the purchase and non-purchase yields, is that something you think that could happen this year based on what you see out there?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

I think it depends on how many Fed moves we have. But, yeah, you're right. It's hard to know. And the purchase loans vary a little bit. But if we get several more Fed moves, I would not be surprised if it converges toward the end of the year.

Blair Brantley -- Brean Capital, LLC -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Bryce Kasser with KBW. Your line is now open.

George Gleason -- Chairman and Chief Executive Officer

Hello? Bryce?

Operator

If your line is on mute, please unmute it.

George Gleason -- Chairman and Chief Executive Officer

Sandra, I think he may have given up. Let's go to our next question.

Operator

Yes, sir. Our next question comes from the line of Matthew Keating with Barclays. Your line is now open.

Matthew Keating -- Barclays -- Analyst

Yes, thank you. My question is on fee income. I just wanted to confirm, you did call out the BOLI death benefits this quarter, the $2.7 million. It seems like that's non-recurring. Is that the correct way to think about that? And maybe just more in general on fee income, do you think this is sort of a low level? A lot of items were down a little bit. Understanding mortgage is down because it's down permanently, but how do you view fee income trajectory as we move throughout 2018? Thanks.

George Gleason -- Chairman and Chief Executive Officer

Yes. Well, good question. And we tend to think of BOLI income death benefits as being one-time items. Although with many hundreds of people insured as we have, we've got an active BOLI program. In Bank of the Ozarks, we've made a number of acquisitions and acquired substantial BOLI portfolios in those acquisitions. So given the volume of people covered by our program, it's not unusual to have quarters where we have BOLI death benefits but you can't really project them. They're random events. So we take them out of our run rate. So in our view, instead of an $0.88 EPS quarter, it was an $0.86 EPS quarter. Was the way we look at it.

Correctly, it is correct to assume that mortgage is going away. As we said, we'll have nominal mortgage income this quarter and essentially none thereafter. Service charges are down from a year ago because of the Durbin Amendment but actually we thought the $9.525 million in service charge income in Q1 was a good number. Q1 is seasonally our lowest quarter of the year in service charge income so we would expect that number to go up. Had a good quarter, I think it was a record quarter, in trust income. Wasn't it, Tim?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

I believe it was.

George Gleason -- Chairman and Chief Executive Officer

And that continues to be a focus for us. Our other income from purchase loans, because of the continued declines in that purchase loans portfolio, the volume of that purchase loan portfolio is going down, that number probably trends down over time. Likewise, gains on sale is driven primarily by liquidation of OREO assets and that portfolio continues to wind down. So that line item will have a downward trend longer term.

On the other hand, loan service maintenance and other fees has had a very nice trajectory over the last several quarters. That includes unused fees and asset management fees from our RESG portfolio and other underwriting and certain fees that we charge. I think that number has an upward trend to it over time that should be very beneficial to us. So there are a lot of moving parts there. Some going up, some going down, but we think the first quarter number, apart from the BOLI income, was probably a pretty conservative number.

Matthew Keating -- Barclays -- Analyst

Thanks. That's very helpful color. My second question would be on the name change. I'm just curious for the backstory. Sort of how long have you guys been contemplating this transition? And maybe how did you end up on Bank OZK, given that you do expect to be entering the national markets, and how you elected to go with that? I know there's obviously a lot of options but I'd love to hear some additional color around that. Thanks.

George Gleason -- Chairman and Chief Executive Officer

We've been contemplating this name change for several years. And the decision to go with Bank OZK was a decision that I recommended to our senior management and after a lot of discussion, they agreed with it. And the idea was to protect and maintain the significant brand equity that we built in the name Bank of the Ozarks over many years. Our customers that do business with us as Bank of the Ozarks know us well. They obviously like us, largely, because we're adding thousands of net new core checking customers and other customers every month. So we obviously have a good reputation, a good relationship with our customer base, a reputation in the investment community for high performance, having been named now 12 times in the last eight years as the top-performing bank in our size group in the country.

So we wanted to protect that brand equity and that value that we've created through hard work and excellent performance. And we felt like the name Bank OZK would be close enough to Bank of the Ozarks that our existing customers and the communities in which we have deep relationships would immediately recognize the name as a natural evolution of Bank of the Ozarks.

On the other hand, it is an edgy name. Putting the word "bank" to the front of it seems to have sort of a European or international flair to it. The OZK, we felt like, just being three letters, would be a very modern name and would convey a sense of technology surrounding it. And technology is a huge focus for us and a significant part of our recipe for the future.

So we just felt like we had a name here that gave us the best of both worlds. It protected the brand equity, the reputation, the relationships we had, and yet was very forward-thinking and would really travel well with us across the country. Of course, we're already doing business in almost every state now. Have customers in almost every state now. So it would travel well with us and even, thinking many years down the road to when we might be traveling outside the U.S., we thought it was a name that travelled well internationally.

So as we decided at the management level that was the name we wanted to go with, we realized that we're not brand experts per se, so we engaged a branding firm to do a series of focus groups and a study to, not suggest alternate names but to just tell us how that name would be received. And that focus group focused on, I think, about 500 people that included existing customers and non-customers in our existing markets and non-customers in markets where we are largely unknown. And the name scored extremely well among all those different groups and accomplished our objectives of being very modern, being very international, but having a warm feel that customers would embrace. And in the case of our existing markets and existing customers, being immediately recognizable as a natural evolution of Bank of the Ozarks. So we feel really good about it. And based on the study we've done, we think we've picked a really good evolution of our name.

Matthew Keating -- Barclays -- Analyst

That's really helpful. And I happen to like the choice so thanks for that color. I really appreciate it.

George Gleason -- Chairman and Chief Executive Officer

Thank you for your support.

Operator

Thank you. And our next question comes from the line of Brian Martin with FIG Partners. Your line is now open.

Brian Martin -- FIG Partners, LLC -- Analyst

Hey, guys.

George Gleason -- Chairman and Chief Executive Officer

Hey, Brian.

Brian Martin -- FIG Partners, LLC -- Analyst

Just a couple things from me. Just the geography of the loan growth, George. Any particular markets driving more of that growth? If you look at maybe the Top 2 Markets, as far as the growth this quarter, any you can comment on?

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

Yeah. The Top 2 Markets are really unchanged. It's been New York and Miami. This particular quarter, Miami actually had more than New York. But I think that's just based on timing and other things. But Dallas, Chicago, Atlanta, Washington, D.C., Philadelphia, those are some of our top markets in the quarter where we saw originations. So, again, really, really good diversification by geography and some really great, great markets.

Brian Martin -- FIG Partners, LLC -- Analyst

Okay. Thanks, Tim. And just big picture on the loan growth, I mean, I think the loan growth, at least on the non-purchase side this quarter, was greater than three of the quarters last year. Is there any way -- I guess in the past, there doesn't seem like there's been -- or more recently in the past, there does not seem to have been a seasonality issue with the growth we're seeing by quarter. In general, do you guys have any feel for seasonality this year or should the originations or the closings be more stable going forward? Or is there any way to think about that?

George Gleason -- Chairman and Chief Executive Officer

Brian, I would tell you our current expectation is that we will have at least one quarter this year that will be less than Q1's growth and at least one quarter this year that will be more than Q1's growth. Now, that could all -- that deck could get totally shuffled by prepayments or changes in the velocity or timing of loan originations. But we think this was a really good quarter but a quarter that is not the best or the worst that we'll have this year. We think it's in the middle somewhere.

Brian Martin -- FIG Partners, LLC -- Analyst

Okay. That's helpful. Thanks, George. And just on the expenses and the impact this quarter from the lower originations. I mean, could the bounce back next quarter be greater? It sounds like some of those originations got pushed into Q2. So, I mean, could that swing next quarter be greater than it is in Q3 and Q4, just given some of the bounce back or some of the stuff that got pushed from Q1to Q2? Is that fair to think about at least that element?

George Gleason -- Chairman and Chief Executive Officer

Brian, that is really hard to project. What I would tell you is I think it will tend to be more level in Q2, 3, and 4. And the reason for that is, yes, we had almost $1 billion -- I think it was $960 million that we thought we would get closed in March that slid to April. So that's a big volume. A lot of the transactions that we worked on in Q1, and particularly transactions of size, will probably not close until Q3. Because they're large transactions that we've got signed up and are working through the approval process but the size, complexity, and the moving parts of those transactions will take a while. So I think what got pushed from Q1 to Q2 sort of levels Q2 with what we would expect to see in Q3 and Q4.

Again, these things tend to move around a lot and, if you look at a projection of closings one week versus a week or two or three later, there's always a lot of movement and those things moving a month or two or three one way or the other. So it's impossible to predict but right now our thinking is that we end up with the rest of the year being more or less level. Among -- and I should clarify that. Level among Q2, Q3, and Q4 originations looking very similar in volume. Much higher than Q1.

Operator

Thank you. And once again, ladies and gentlemen, if you do have a question at this time, please press "*1". One moment for any further questions.

And I'm showing no further questions. I'd like to return the call to Mr. Gleason for any closing remarks.

George Gleason -- Chairman and Chief Executive Officer

Alright. Thank you, Sandra. A few days ago, as I mentioned earlier, we were named the Top Performing Bank in the country in our size group. This is the eighth consecutive year that we've been named as the Top Performing Bank by one or more leading industry publications. This is a tremendous honor, achieved through the hard work and the teamwork of all of our employees. We're very pleased with our past accomplishments and we're very excited about the future. Our first quarter results provide a strong start for 2018. There being no further questions, this concludes our call. Thank you so much for joining us today.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 57 minutes

Call participants:

Tim Hicks -- Chief Administrative Officer and Executive Director of Investor Relations

George Gleason -- Chairman and Chief Executive Officer

Greg McKinney -- Chief Financial Officer and Chief Accounting Officer

Tyler Vance -- Chief Operating Officer and Chief Banking Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Michael Rose -- Raymond James & Associates -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Stephen Scouten -- Sandler O'Neill + Partners, L. P. -- Analyst

Matthew Olney -- Stephens Inc. -- Analyst

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Blair Brantley -- Brean Capital, LLC -- Analyst

Matthew Keating -- Barclays -- Analyst

Brian Martin -- FIG Partners, LLC -- Analyst

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