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Bank of the Ozarks (NASDAQ: OZRK)
Q2 2018 Bank Of The Ozarks Earnings Call
Jul. 12, 2018, 3:00 pm ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Bank of the Ozarks second quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question and answer session and our instructions will be given at that time. If during your conference today you require operator assistance, press star then zero, and our operator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to hand in the conference over to Mr. Tim Hicks. Sir, you may begin.
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Good morning. I'm 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. 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're very pleased to report our excellent second quarter results, and will begin by opening up the lines for your questions. Let me ask our operator Brian to remind our listeners how to queue in for questions.
Questions and Answers:
Operator
My pleasure, Sir. Ladies and gentlemen, if you'd like to ask a question over the phone lines, press star and then one on your telephone keypad. If your questions have been answered and you wish to remove yourself in the queue, simply press the pound key. Once again, ladies and gentlemen, to ask a question, that is star and then one. Our first question will come from the line of Ken Zerbe with Morgan Stanley. Your line is now open.
Ken Zerbe -- Analyst -- Morgan Stanley
Great. Thanks. Good morning everyone.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Good morning, Ken.
Ken Zerbe -- Analyst -- Morgan Stanley
Thought why don't we start off on the core spread. I am kind of try to narrow this down a little bit, but just I would love your broader thoughts on this. You mentioned in the release that over time going forward, you do you think that core spread should eventually move higher, but when I think about the pieces and think about sort of let's call it a rough mid 60's asset beta or loan beta, but in this quarter's deposit beta which interest-bearing is 84%. Like, how do we end up in a place where core spread actually expands? Like it seems that something would meaningfully need to change? I suspect it's on the deposit beta side but I mean essentially are you calling for core spread or the deposit beta to actually come down next quarter? Thanks.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well, great question Ken, thank you for asking that. Our hope is that deposit betas will come down and we are reviewing and have been reviewing in recent weeks our results in that regard for the quarter just ended and looking at ways that we can fine-tune our approach to that. We have some actions and steps that we're taking in an effort to do that. We are not certain those will achieve the desired result, but we think they will achieve the desired result.
So, I think the answer to your question really is two-parts. One, yes, we hope to improve that deposit beta in the third quarter and the fourth quarter of this year, and No. 2, is we hope that we'll get a little more lift on the loan side, our non-purchase loan yields improved 18 basis points in the first quarter of the year, I believe it was. Is that correct, Tim?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
That is.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
And 14 basis points in the second quarter and obviously that core spread would have diminished less than half of what it did if we gotten the same 18 basis point left on the loan side. So, we hope we'll see better results on both sides.
Ken Zerbe -- Analyst -- Morgan Stanley
Okay, and just to mix up the questions a little bit. In terms of the growth, I wanted, I guess, your comments in the release was that you think competitors offers aggressive credit structures and pricing. I would love to get more detail on that. Is it, like, how broad is that? Is there any geographic concentrations on where you're seeing it? Thanks.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well, we've seen a number of new competitors enter the CRE space over the last year. And that has been more or less broad-based. I would not say it's in every market with the same intensity and bigger, but we've seen a clear increase in competition, and a lot of markets, and a lot of product apps, with competitors competing both much more aggressively on bill structure and on pricing. We have always said, and no one should be surprised at our actions in this regard, We've always said that asset quality is the most important in the asset quality pricing growth equation for us, and that growth is a tertiary consideration.
So, the way we have approached it and will continue to approach it, is we're going to hold very firmly to our long-standing asset quality standards. Those are not negotiable. We will get as aggressive on pricing, as we can to be competitive, while still achieving our minimum return on allocated capital for each loan. And growth will be the variable that will adjust up or down depending on how market conditions play out. So we're quite content to have less growth, unless we can get that growth on credit quality and pricing standards that make sense to us. I would hope that any thoughtful holder of our company stock would applaud that approach, that credit quality is just not something that you want to play with or take chances on and return on equity is not something you want to get below a minimum target level and approach suffers because you're being disciplined, then so be it.
Ken Zerbe -- Analyst -- Morgan Stanley
Well, guys. This will be my last question, but I guess just on the growth piece. The way you're describing it and I'd totally understand what you mean, and I'm glad you're being conservative on credit, but you mentioned that you are less certain that you can actually outgrow last year, but it seems that what you're describing, it should be not just lesser, it should be just like growth could potentially come in meaningfully lower than the growth last year, given the increase in aggressive competitor. Is that a fair statement or is there some reason why growth should accelerate in the back half?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well, Ken, let me tell you this. If our crystal ball was perfect, and we knew exactly what growth was going to be, we would tell you and everybody else on this call what our growth number was going to be so there would be no uncertainty about it. But we do live in a world that has uncertainty, and variables, and many customers, and many competitors, and it's a dynamic landscape. So we have not throw it the pall or don't consider it impossible for us to beat last year's number, but it is a more competitive environment than we envisioned when we gave that guidance earlier this year and last year. And that has created uncertainty about our ability to hit that number.
I think the more important reality that our shareholders ought to be focused on, is whether we come in at 75% or 125% of last year's growth number. Even on the low side of that, we would be producing an organic growth rate that's twice, probably what the industry is producing. So whether we're growing it at two or at three times the industry, we're still generating an excellent growth and certainly, with our stock trading where it is, you buy that growth at a deep discount relative to competitors. So, I think there's an excessive focus on why are they going, are they going to be a little more than last year, or a little less than last year, or a lot more than last year, a lot less than the last year? And the reality is, that our growth is going to be at a very good metric versus the industry.
We don't know what it is going to be today. We'll know that in six more months, but we think it's going to be very good growth and we're obviously not getting rewarded for it.
Ken Zerbe -- Analyst -- Morgan Stanley
All right. Great. I'll get back in the queue. Thank you very much.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you.
Operator
Thank you. And our next question will come from the line of Catherine Mealor with KBW. Your line is now open.
Catherine Mealor -- Analyst -- KBW
Thanks. Good morning.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Good morning, Cath.
Catherine Mealor -- Analyst -- KBW
One follow-up on the growth. Their outside is just the competition. Would you say, George, that the flow of quality deals have changed as well? Or is it really just more on the competition side of the equation?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
I would say the flow of quality deals has changed. Cost of material or construction are going up, cost of labor for construction are going up, construction period, interest costs are going up. So that makes it more challenging for our sponsors to find and pursue viable projects that are going to meet their returns on their equity investments in the project, in an environment where you're seeing very little increases in rental rates for sales rights. Most property types that we're seeing in most markets around the country, your rental rates or your sell rates are not materially different up or down in where they were a year or so ago. So your cost to produce the asset is higher. The value of the asset is up a little bit or down a little bit from where it was a year ago. So, it is making it harder for sponsors to find deals that make sense.
And we've seen sponsors shelf deals that didn't make their target equity requirements, and so forth. So, you have an interesting dichotomy here and that you've got an environment where there are probably fewer deals that are going to meet our very rigorous credit standards, and you've got a lot more competitors in the space chasing those deals. Clearly, it was more favorable environment for us a couple of years ago when we could find more good deals than we could close that met our standards and there was much less competition in this space.
That dynamic has changed, and I think one of the great strengths of our company is our discipline and willingness to do what's right even if it impinges on our growth numbers. We would have had no problem achieving growth. I think our growth through the first six months here was about 2% ahead of last year's growth rate through six months. We would have had no problem achieving growth 20%, 30%, 40% ahead of last year's had we been willing to sacrifice our standards to do that, but that's not the way we run this company and not the way that we have had better than industry credit metrics every year since we went public.
Twenty-one years ago, and those credit losses over that 21-year period of time that averaged 32% of the industry's average credit metrics, and it's because we've been disciplined. We're not perfect, but we've been much better than average because we've been very disciplined.
Catherine Mealor -- Analyst -- KBW
Makes sense. All right. It's really helpful, thank you. And then another one is just on the indirect RV and marine portfolio, can you just kind of give us some more detailed and updated background on that portfolio given us now $1.5 billion and with most of the growth this quarter. Just kind of talk from the underwriting standards of that portfolio, the average size of credits, kind of profile of your typical customer, yield on that portfolio, just kind of those things. And then how large you think that portfolio can get over time? Thanks.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Okay, great question. Thank you. One of the gems in the community and Southern Bank acquisition that we did in July of 2016 and predominantly [inaudible] was the indirect marine and RV business. They ran the indirect marine, RV, and auto loan Business. We looked at all of that and really did not like the auto loan Business at all. Felt like there was a lot of risks there and that it didn't yield a particularly high return by our standards. On the other hand, we really liked the marine and RV business because they were pursuing a very high-quality customer, and we're getting better yields for it. So what I would tell you is in recent quarters, the credit scores on our customers in that book it averaged 8790.
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Originations this year averaged 792.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Seven-ninety-two credit score on this year's originations. So it's a hot prime, super-prime type customer base. There's a strong emphasis on lifestyle customers, people who have owned multiple RVs and multiple boats before, so they understand what they're getting into, and that combination emphasis on high credit scores and lifestyle customers typically mean that your customer base has high-income metrics and high balance sheet metrics. So as we said in the management comments, we have grown really excited about this unit because it is a unit that allows us to get much more exposure and diversification of our portfolio to the consumer sector, while at the same time being true to our standards of high credit.
So many ways that you would get exposure in the consumer credit environment, you wouldn't get that high credit and you wouldn't insulate yourself from wide swings and credit performance and economic cycles. We feel like this business really gives us a high net worth, high-income, high credit score of customer that will be resilient and economic downturns and it's good exposure and a good diversification of our portfolio toward the consumer sector. The question about yields on the portfolio, our yields on the portfolio, net of the amortization of premiums that you pay for that paper, we do pay a premium for that paper. So net of the amortization of that premium over the expected useful average life of those loans, the yields on the portfolio are just very, very close to the yields on our total portfolio of non-purchase loans. So, it's not dilutive or accretive in any meaningful way to our yield on non-purchased loans. It's really tracking right in line with the average on that. So, it's a good yielding portfolio with high credit quality in our view.
How big can it get? We think it has significant growth trajectory as you can see on, I think it was, page seven of our management comments. There's a graph at the top of that that shows the growth trajectory of that, and the growth in the number of RV and marine dealers that we're doing business with across the country. We expect both the volume of the portfolio and the number of better relationships to continue to grow. You noted that it was a lion share of our non-purchased loan growth in the quarter just ended. I would note and caution you to not expect Q2's growth to necessarily be repeated in Q3 and Q4 because it is somewhat of a seasonal business, and in most years, we would expect that the second quarter based on seasonal factors would be the largest quarter of growth for the portfolio.
Catherine Mealor -- Analyst -- KBW
All really helpful color. Thank you.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you.
Operator
Thank you. Our next question will come from the line of Timur Braziler with Wells Fargo Securities. Your line is now open.
Timur Braziler -- Analyst -- Wells Fargo Securities
Hi, good morning.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Good morning.
Timur Braziler -- Analyst -- Wells Fargo Securities
My first question is around the deposit base, I'm looking at Betas versus growth this quarter, I would love to just hear any more color on what was driving the Beta specifically in Q2. Was that all posted rates, was that all negotiated rates? Any color behind that would be helpful.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Tim, I don't know that I can give you a lot of meaningful color. I would tell you it was in part negotiated rates, part RFP rates. We had some relationships that if had public funds and other relationships that were under RFPs from earlier dates of those cycles of that business came up to reprice for that, rebid that. So, we got a little push in our cost of funds from some of those, and then it was in some markets, on some product perhaps posted rates as well. So, it was really a combination and I don't have a breakdown and tell him, perhaps you have a breakdown at your fingertips.
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
I don't have a breakdown to it.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
So, that's about all we can tell you. It was a combination of factors.
Timur Braziler -- Analyst -- Wells Fargo Securities
Okay, and then going back to Ken's question and your answer about looking at different strategic initiatives currently to try and lower Beta going forward, any additional color you can provide on that, and what's the opportunity to really tap some of the more rural markets, and align the deposit market share closer to the branch market share?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well, certainly I think there's a tremendous capacity to align our market share in line with our branch infrastructure, over time as we need to do that. So, that really is what I would say about the second part of that question. The first part of that question, the answer is yes, I could give you a lot of details about actions that we're taking are initiating to try to reduce that deposit beta in Q3 and Q4 but I'm not going to do so for competitive reasons. If you don't mind, I would rather be effective in doing what we're doing and implement that without telling all of our competitors exactly what we're doing as opposed to telling you about it and then have trouble getting results where we once promised.
So, we do have a plan of action about how we're approaching that, we were not pleased with our deposit betas in Q2 and we feel like we can refine some of our approaches and strategy in that regard not changing the many brawl wholesale away, but just tweaking how we're doing that and get better results and in the coming quarters. There is no guarantee about that but we think we've got an approach that will be helpful.
Timur Braziler -- Analyst -- Wells Fargo Securities
That's understandable and then just one more for me just circling back on the indirect RV and Marine portfolio. As you think longer term obviously credits been phenomenal for the bank as a whole, but as you think longer term for this product set going through the next cycle whenever it may be and how severe it may be, just can you give us some color around just broader allowance methodology? Allowance trajectory? Should we expect to see continued build of allowance as that portfolio gets bigger, or are you thinking the inherent loss profile there isn't going to be very different than what you've seen at the bank as a whole?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well obviously, the loss profile on my portfolio will be probably more like our other consumer small business portfolios and less like our RESG portfolio. So, to give you a perspective on that I think at June 30 when we did our modeling calculations on that portfolio, we had a 1.07%, am I remembering? Yeah, we had 1.07% allowance for that portfolio and that compares to 0.74% allowance for the total portfolio. So obviously, there are two factors that play into that. One, those are longer duration loans on their contractual face amount, so we're holding more allowance for the longer duration of those and to just consumer credit is going to have a slightly higher loss profile than our RESG portfolio even if it's hot-prime, super-prime type of credit, we believe based on our modeling. So it's a relatively modest difference, but not concerning to us at all. Again, I think the key to the pursuit of this line of business for us, is we believe it gives us diversification and exposure to the consumer segment and we said this in the comments in a way that's consistent with our commitment to excellent credit quality.
Timur Braziler -- Analyst -- Wells Fargo Securities
Understood. Thank you.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you.
Operator
Thank you and our next question will come from Jennifer Demba with SunTrust, your line is now open.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Hi Jennifer.
Jennifer Demba -- Analyst -- SunTrust
Morning, George. Question for you, you said that demand has slowed a bit for the RESG loans and I think you said it wasn't geographic in any way. Has it been any difference in demand in product type that you've noticed?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Nothing appreciable, no.
Jennifer Demba -- Analyst -- SunTrust
Okay. One more question on the marine and RV loans. What is the average size of those loans?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
It's roughly around a $100,000.
Jennifer Demba -- Analyst -- SunTrust
Okay. How comfortable as a percentage of the total loan portfolio are you comfortable growing that overtime?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Jennifer, I think it will grow. We haven't set any sort of growth limit from the portfolio. While these loans tend to be longer-term fixed rate loans, the reality is, they're probably somewhere between three and four years and an average life because of the fact that being high-income, high-net-worth borrowers predominantly, these customers tend to trade up on a fairly frequent basis and they tend to have capability to pay off these loans fairly quickly. So, it's really sort of three to four-year average life project products. So, what I would tell you is you probably see us continuing to have pretty good percentage year-over-year growth in that product category for the next couple of years, and as that portfolio gets to more likeness to our state two or three years out, where we're having a lot of pay-offs in that portfolio and a lot of trade-ups in that portfolio.
The growth probably gets into more of a long-term sustainable growth rate. I think we've got a pretty good runway for a mass percentage growth for that portfolio over the next couple year.
Jennifer Demba -- Analyst -- SunTrust
Thanks very much.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you.
Operator
Thank you. Our next question will come from Stephen Scouten with Sandler O'Neill, your line is now open.
Stephen Scouten -- Analyst -- Sandler O'Neill
Hey, good morning guys.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Hey, good morning.
Stephen Scouten -- Analyst -- Sandler O'Neill
You guys have taken a pretty long-term view on the stock which I appreciate. I'm wondering if given where the stock is currently trading in the fact that you mentioned, you're no longer subject to DFAST and the capital raises, I think we were all kind of expecting would need to occur to meet those hurdles. Do you think about a share buyback of a material proportion at this point or are the day one dilutions something you'd be hesitant to undertake? If so, I guess, what's the delimiting factor in terms of the capital ratio for you guys moving forward?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Stephen, good question. I would tell you all options are on the table for consideration at any time in how we manage our capital position. Obviously, we expect as we've said in the past, to achieve good growth. The future will have times when that growth will be higher than others. If history is a guide, the times when we'll have the highest growth or times when other competitors have pulled back from various spaces and provided some opportunity to really thoughtful, intelligent things, in a meaningful way and volume. So, we expect to continue to need some of the excess capital we've got over what's well-capitalized or adequately capitalized plus capital conservation buffers. Today, if you look at the management comments, Tim, what page was that, that we put that on? Thirty?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Thirty-four. Page is 34.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Page 34, the management's comments, figure 32, we had a very nice increase in our capital ratios in the quarter just ended. Part of that was because of the reduction in capital allocated for unfunded loans. With that unfunded balance went down. Part of that was the new DFAST or the new HVCRE clarification that came as part of the Senate Bill 2155 that was signed into law. Part of that was just our organic growth and retained earnings and capital retention after the dividends. So, we have a generous capital position. We will expect to maintain a good cushion over what will be the fully phased-in Basel III standards for well-capitalized or adequately capitalized plus the capital conservation buffers.
Within the limits of those constraints, we've got options to consider all alternatives, and one alternative is possibly, they considered with the issuing some other form of capital to replace some common stock to some extent that would be accretive to our EPS number. So, we're looking at that, we'll continue to look at that, and make what we think are the appropriate decisions balancing all factors.
Stephen Scouten -- Analyst -- Sandler O'Neill
Okay. Makes sense. But your view would be, you wouldn't necessarily bleed that 11.9% CET one down to like 10 and a half, it would be more of a replacement in the capital stock with some other form of capital?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Again, there are a lot of variables and a lot of options there.
Stephen Scouten -- Analyst -- Sandler O'Neill
Okay.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
One option would be to replace some common equity, if we did a stock buyback with either sub debt, or preferred, or some other form of capital that the swapping of which would be net accretive to EPS, but we're not saying we're going to do that, we're just saying we're evaluating all options.
Stephen Scouten -- Analyst -- Sandler O'Neill
Yes, make sense. Okay, and then maybe thinking back about the cost spread, one question I have on just the moving parts there. Was there any sort of material impact within the non-purchase loan yields from deferred origination fee, kind of quarter-over-quarter. I know that was somewhat of a negative impact last quarter in expenses and other things. So I was wondering if even though it moved up 14 basis points with some of that quarter-over-quarter impacted by the deferred origination charges, and just with that seeming dislocation between the move in LIBOR and fed funds, I guess, how can you help me think about that or am I just making something that's not really there?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Stephen, I don't think there was a material impact one way or the other from prepayments in the non-purchased loan portfolio or the impact of cost referrals or anything. I mean, that was all both quarters at a fairly normalized rate, I believe. We do have impacts every day to some degree, a few $1000 or a few $100,000., some days plus or minus from loans, but prepay sooner that paid early in the life of the loan where there were deferred fees or deferred cost, or a net of those credit or debit that impacts earnings, but both Q1 and Q2 were pretty typical in that regard.
Stephen Scouten -- Analyst -- Sandler O'Neill
Okay, great. Then last question [inaudible] I apologize if I missed it in here somewhere, but the amount spin up mode, did you give a number for that or where we are relative to where you were maybe last quarter?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Tyler, do you have that?
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
I do. Total bankwide currently, it's given at 44 offices. So about 18% of the total offices that are in spin up today, and the specials we're offering in those offices range from 13 to 15 months from a 2.01% APY to a 2.30% APY.
Stephen Scouten -- Analyst -- Sandler O'Neill
Okay. What was that number was it like, I'm trying to look it up, was it like 37 offices last quarter that we're in spin mode or?
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
Yes, it's pretty close to that.
Stephen Scouten -- Analyst -- Sandler O'Neill
Pretty close, OK.
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
In that range for several quarters now.
Stephen Scouten -- Analyst -- Sandler O'Neill
Okay, great. Okay, thanks, George I appreciate your color, guys.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you.
Operator
Thank you. Our next question will come from the line of Arren Cyganovich with Citi. Your line is now open.
Arren Cyganovich -- Analyst -- Citi
Thanks. I was just thinking in terms of potential slowdown in loan growth, a bit what your ability to dial back your operating expenses? Are there any kind of leverage around that to help maybe offset some of that from an operating leverage perspective?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
I would say that is fairly minimal. We, of course, operate with probably an efficiency ratio already this probably in the top 1% or 2% of the industry. So, we don't have a lot of fact. We pay our lenders to make loans, and we pay our lenders to not make loans. By that, our lenders are instructed to make every good-quality, good-yielding loan, that can make consistent with safe sound and prudent banking standards. We articulate eight rules for them. We say that if you can't achieve all eight of those objectives on every loan, don't make a loan. So, if we've got a lender who is operating in an environment, he looks at 100 loans over the course of this year, and make zero.
Because competitive dynamics have made it impossible for him to make loans that meet all of our standards. Then, we're going to reward that guy for his discipline and is hard working, creating a 100 opportunities, and not punish him because he didn't produce any loans. If he worked hard and went out and pursued our standards, and you don't want to cut that person just because you didn't make any loans this year if he's doing his job well, and following our standards. Because next year, the year after, he might be the guy that makes 30 of those loans.
So, we do take a very long-term view of this. Our lenders understand when volume is a tertiary consideration, and quality is No. 1, and profitability is No.2, you have to be consistent in the way you approach your lenders on that, because they've got to understand that not hitting a certain volume metric is OK as long as you're doing work, you're working hard, you're producing opportunities, and you're not hitting the volume metric because you're adhering to our standards for quality and profitability.
So, that's inherent in our culture. So, there's not a lot of variable costs we're going to take out if our loan growth is 75% of last year's number or a 125% in last year's number, it's going to be pretty much the same cost structure.
Arren Cyganovich -- Analyst -- Citi
Okay. Thank you. Then, in terms of the competition for RESG, are you seeing it more on pricing or structure? I'm trying to get an idea, there's been some concern from investors that return hurdles may start to go down a bit because of giving back some of the benefit from tax reform. I'm kind of curious if you're seeing it more on the pricing side?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Both. As we said in our management comments, we've seen increased competition on both structure and pricing.
Arren Cyganovich -- Analyst -- Citi
Okay. Then just a quick modeling question. Do you happen to have the purchase accounting accretion for the quarter, how much that was?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Yeah, it was roughly the same as it was in the first quarter which was $12.6 million recognized during the quarter.
Arren Cyganovich -- Analyst -- Citi
Got it. Okay, thank you.
Operator
Thank you. Our next question will come from the line of Michael Rose with Raymond James, your line is now open.
Michael Rose -- Analyst -- Raymond James
Hey, good morning guys.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Good morning.
Michael Rose -- Analyst -- Raymond James
Hey, I wanted to get back to this quarter's provision and reserve and how we should think about as we move forward. I assume obviously you building in a higher level of reserves for the RV and Marine business, and that was a good portion of this quarter's growth. But as we get through 2019, how should we think about the trend in the reserve ratio, assuming that you still have pretty solid growth in that business and maybe RESGs are a little bit slower? Then, if you can give us your initial thoughts on what the impacts of Cecil will be for you, thanks.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well, it's too soon to comment on say so. I think well, would you agree with that? I mean, we're doing work on that but that's a one, one, 20,20.
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer -- Bank of the Ozarks
Yeah. I think the, um, you know, from [inaudible] I'll let George talk to the, uh, first question [inaudible] I would say that, wherever bad ends up. Whether it's the same allowance, less allowance, more allowance, we're still working through that analysis and trying to determine where that's going to be. We're probably still three or four quarter before we really begin to have some [inaudible] results from that Michael. But regardless of where that ends up, that's kind of a onetime. In our minds, a onetime kind of reset of the allowance as a percent of that portfolio, Our thoughts at this point in time, as you think about that moving forward those net pool once you implement Cecil, I don't anticipate there being a material change to our quarterly provisions.
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer -- Bank of the Ozarks
I don't think Cecil is going to require us all of a sudden to start booking significantly more, significantly less provision assuming all else is the same. So, I think it's kind of a onetime implementation adjustment. Assuming it is an adjustment and then I think the ongoing provision is, again, all things being equal, not going to be materially different in what we've been running over recent quarters.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Yeah, and Michael, what I would tell you on the provision expense, I mean, if you look back on page 13 of the material that was part of our press release where we got that eight quarters of data, our provision expense in the quarter just ended, was $9.6 million. That is not the highest in the last eight quarters, the highest was Q4, '16, $9.855 million. We had another $9 million quarter in Q4, '17, and those numbers have kind of vary from just under $5 million to just over $9 million, and I think, quarter-to-quarter, those are probably indicative of ranges we would expect to see. We're not expecting a fundamental change in economic conditions or portfolio conditions that would dictate a wide variation in that provision expense.
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer -- Bank of the Ozarks
And to George's earlier points, with the RESG portfolio, we've got the history there, we understand and we've been doing that for years and years, the allowance we carry for those loans, both very low leverage loans is probably, that's the low end of the loans we carry for [inaudible] consumers small business and other sectors of portfolio just because we have, the knowledge, the history, the performance there in the marine. In RV is a little newer sector for us and we feel really good about the credit quality of that sector as well, but we do carry a little higher allowance as a percent of loans and that's it.
Michael Rose -- Analyst -- Raymond James
Okay, that's helpful. And then, maybe back to the expense question that was just asked. Now, I know you guys have spent some money to build out systems and things of that sort to become a much bigger bank. Where do we stand with that, and could we see some expense leverage in the back half of the year or is the money that you've spent over the past few quarters, will that be spent in other areas, [inaudible] we shouldn't expect to see kind of a net reduction as we move forward? Thanks.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Yeah, Michael. I think the comment we gave on that in one of our previous calls recently was is that we would expect to see a continued build of human infrastructure to some degree. Most of that is in place in our company, but we will continue to add some people doing some things related to this buildout of IS, IP, cybersecurity.
All the elements of risk, credit review, internal audit, and so forth. We've got a few more people to add in those disciplines and other similar disciplines. But we do hope that those additional cost increases will be offset by reductions in our consulting expenses. We've been spending a lot of money on consulting work, building out a lot of this infrastructure, and we expect and hope that that's going to moderate as we get more of our own people in place doing those functions and get them more effective and have less of that infrastructure built.
Michael Rose -- Analyst -- Raymond James
Okay, that's helpful. Then maybe just one last one for me, just on the growth from the securities portfolio. If I remember correctly, I thought you guys were just about done with that but then the commentary implies that there could be more to do. Any sense for magnitude?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
No, not really. Part of that will be based on opportunity. Sure, our regulators would always like us to hold more liquidity. Our shareholders would like us to less liquidity because the margins on that liquidity are not as good as the other elements. So it's a balancing act of achieving management shareholder desires in regard to returns and meeting our internal requirements and regulatory expectations regarding liquidity. As our balance sheet grows, we will have to keep additional liquidity on balance sheet. We know that, expect that. The magnitude of that is not as clear to us, but we know the direction is toward having more liquidity on balance sheet.
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer -- Bank of the Ozarks
Okay. Maybe just one last quick one for me. I'm sorry. Back to Stephen's question about kind of shareholder value and unlocking it. Given where you guys are trading, would you ever consider a sale? I mean, does that ever come into play? Where you are at a point where evaluation, where somebody could actually make the math work, particularly about your growth. Just as we think about unlocking shareholder value, is that in the cards at all?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well. It's not. It's certainly not a focus that we have Michael, but at the same time, we're a publicly traded company, and we've got to do the right thing for shareholders and we understand that. So, if offers came our way and somebody else substantial premium, our board would have no choice but to fairly and thoroughly consider the option. That's not a direction we're pursuing, not a direction that I think we go but again our board has got an obligation to consider all options just as we would consider all options regarding the components of our capital structure.
Michael Rose -- Analyst -- Raymond James
Great. Thanks for taking my questions.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
All right. Thank you.
Operator
Thank you. Our next question will come from Brock Vandervliet with UBS. Your line is now open.
Brock Vandervliet -- Analyst -- UBS
Hi, good morning. Thanks for taking my question. George, if we could just circle back to the growth issue. Maybe you could talk about the unfunded commitments because it seems like it's such a massive number that should kind of carry the day, carry the rest of the year. I'm curious what's happening there. Is that what you're talking about in terms of transactions just don't pencil given higher expenses as people now look at them, or what's happening there in terms of that pull through?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Brock, I'm not sure I understand your question but let me try to intelligently respond to it even if I don't understand it. The unfunded balance of our construction loans which is about 97%, probably of our unfunded 93% of that RESG, and there's probably another 3% or 4% of Community Bank fits construction loan. The other minute part is, other types of lines credit and so forth. But, the vast majority of that unfunded is construction loans. In the typical loan, the vast majority of the loans were the last dollars in the transaction in the first dollars out. So, if we have a $50 million loan on a $100 million transaction, all of the 100 million of equity or our Medistad or whatever the other capital components will typically be in the loan before we find them, we'll fund the last dollars out.
So, if you've got a construction loan on a project that's simple and small and easy to build, that construction loan may fund up in nine months or 12 months or 15 months. If you've got a construction loan on a really large, complex, mixed-use project and we're 30 or 40% of the cost of that, we might not plan to the second half of year two or year three or even beyond. So, the reality is that, I think your point is, why if you got 12 million in unfunded commitments, that's going to take care of your growth for the year. But, the reality is that, $12 billion will not all fund. Probably, somewhere 85% to 90% something of it's going to fund, and what does fund is going to fund some this quarter, some next quarter, some each quarter next year, some each quarter 2020, and they'll be little sales, but will run out even beyond that.
So, it's a long-term realization of those balances being on our books. At the same time, we've got a constant rate of payoffs and constant-. Maybe the wrong word. On ongoing rate of pay offs that was near a billion dollars in Q1 I believe and a billion four in Q2, and that's just from the RESG portfolio, that doesn't count the other portfolios. So, there's one to $2 billion of loans getting paid down every quarter. As you fund up, your unfunded balances on those construction loans that are already booked and as you make new loans to create new volume. So, we've got a very detailed process for managing and projecting that at the RESG. It's a loan level projection of how much funds every month, when a project should stabilize, when it should pay off, what's sellout rate will be on it, and so forth.
So, we're showing on the loan level at RESG, on closed loans and loans expected to be closed, what funding on those as, what pay-downs on those are expected to pay, and then based on pools of loans from elsewhere in the company we're looking at that on a portfolio and pool level loans. So, we have pretty good Intel that tells us how much liquidity we're going to need in any given month for the next 36 months to fund that. Those projections are not perfect and obviously they're much better over the next three months than they are in months 12 through 15, and 12 through 15 are much better than the months 24 through 27. But, we're constantly reprojecting that number. Looking at a 36-month forward funding forecast. So hopefully, that answers your question about how that unfunded works.
Brock Vandervliet -- Analyst -- UBS
It does. Thank you very much. Is there anything you can share with us in terms of the granularity of the RESG portfolio, in terms of like 10 largest commitments or x percentage of the entire portfolio or something like that?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
I don't have that data at hand. I think our average loan size last year was about 77 million, is that right or 80 million?
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
I think the average originations was around that, the average in the portfolio was closer to 60 million.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Okay. So, there's approximately, in the RESG portfolio, there're approximately 350-ish-
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
Correct.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
-loans, plus or minus in that portfolio and-
Brock Vandervliet -- Analyst -- UBS
Okay.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
- [inaudible] 77 million or 60 million is an average origination in that portfolio average, that funded and unfunded balance for it.
Brock Vandervliet -- Analyst -- UBS
Got it. Okay. Thank you.
Operator
Thank you. Our next question will come from Matt Olney with Stephens, your line is now open.
Matt Olney -- Analyst -- Stephens
Hey, thanks. Good morning guys.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Hey, good morning.
Matt Olney -- Analyst -- Stephens
George, I want to stick with Brock's questions on the RESG portfolio and the dynamics behind it. I think it would be helpful to put some numbers behind this. We can understand some of the puts and takes, and I believe you disclosed that the RESG pay-downs were $1.4 billion in 2Q, but could you also disclose what the amount of originations were from RESG in 2Q, and then what the level of RESG advances were in 2Q as well?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Tim, you want to take that?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Yes, Matt, the advances for roughly 34 million more than the repayment so-.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
That was the net growth?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
That's the net growth.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
In five years.
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
So, they have roughly a billion, over a billion to as originations during the quarter.
Matt Olney -- Analyst -- Stephens
Tim or George, that a billion two of originations, you talked about how your sponsor to be more selective on some of the deal flow, how does that 1.2 billion compared to previous quarters?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Q1 was-. Tim, what was Q1?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Q1 was around a billion.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Yeah.
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
The average last year was over $2 billion.
Matt Olney -- Analyst -- Stephens
Got it.
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Fourth quarter.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
So, if you look at that, you'd say, OK, we're running at about half the origination volume in RESG, we were a year ago, and on an average basis that would be true. The reality is, a higher percentage of our originations occur, typically, in the fourth quarter of each year, and that's certainly been true the last two years. So, we would expect some boost in that origination volume as we go through the year, and part of that is, a lot of the competitors that we deal with, get annual allocations. So, they've got $700 million for apartment loans or a billion dollars of office building loan we're going to make, and their originators are paid bonuses based on achieving their goals.
So, a lot of our competitors come out of the chute very aggressive if early in the year, they get their quotas, they get their allocations billed, and they tend to go by the wayside. So, our volumes in Q3 and Q4 have traditionally benefited from the fact that a lot of our competitors get out of the space after they fill their allocations. Our guys work seven days a week, 365 days a year, and we run through the tight at the end of the year, so we tend to get an extra boost in volume in Q4. Hopefully, this year will be that way again as it has been in five years.
Matt Olney -- Analyst -- Stephens
That's helpful George, and then as far as the $1.4 billion of RESG pay-downs, I know we've been talking about pay-downs for well over a year, it seems like it, but how does that number in 2Q compare to the more recent quarters?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Well, like I said, it was a billion poor in Q4 of last year was $1 billion roughly in Q1 of this year, and I think a billion dollars was sort of the high-end before Q4 of last year. So, we have had a higher number and that just reflects the fact that we've had a lot of growth in that portfolio in recent years. And a lot of those projects that we booked two or three years ago to sort of put some color on Ken's RVs question and Brock's question, a lot of those projects we booked two or three years ago are stabilizing now and are either refinancing to permanent market, or their condos or other sorts of development loans are selling out and that's why we said we expect in Q3 and Q4 our run rate of pay-downs and payoffs to continue to be elevated as we've got a lot of projects that are going to see over the next two quarters and sell out.
We know that excess buyer, so we'll have to overcome that loss of volume with new originations and fundings on the existing loans and that's why we've given the guidance we've given. Some of those projects are selling faster and are tending to move to permanent financing faster than in the past, and that is tending to accelerate the realization of those pay-downs.
Matt Olney -- Analyst -- Stephens
Understood. Thank you.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you.
Operator
Thank you, and our next question will come from the line of Brian Martin with FIG Partners, your line is now open.
Brian Martin -- Analyst -- FIG Partners
Hi, George.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Hey, Brian.
Brian Martin -- Analyst -- FIG Partners
Just one question back to that payoff question we just talked about. The payoffs, I guess if you look at the next two quarters we you got maybe more visibility on those payoffs, I mean. You've talked about this in the past I just don't recall, but I guess if you look at next year and how you guys are thinking about payoffs, is there any impact from rates going up it slows down the payoffs or is it just based on when you book these projects and kind of how you see them unfolding, just trying to get a gauge for how we should think about payoffs in 19 with a little bit more color behind what's going on there. So.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Brian, our fault is and our history seems to form those out as being about thought is, but our thinking is that as long as rates are expected to go up sponsors on income producing properties are going to try to refinance as soon as they can and the reason being if you're paying us 6% on construction loan and you can get permanent financing this twice as much money at 5% and today that's fixed long term, you want to get out of our 6% loan and get to the 5% and you want to do it as quickly as possible because you think rates are going to go up next quarter and the next quarter and next year and the five permanent loan may become 5.25% and 5.5%.
So, the fact that the expectation is that writes going out is encouraging sponsors to refinance long-term fixed rate faster than if they thought rates were going to fall. When we get to what we think is the peak of the cycle, we would expect loans to stay on the books longer because then, our sponsor might be paying us 7% on a construction loan, may be able to go again at twice the dollar amount at 6% on a permanent loan, but he is thinking why wait three more months? Permanent loan rates are going down, and I can get refinanced at 5.75%, or if I wait nine more months, permanent rates may be 5.5%. So, when we reach a point where the expectation is that rates are going down the assets will tend to stay on our books longer because the sponsors will want to maximize their exit into their permanent financing. Now, if you're talking about condo sales or lot sales or single-family home sales, those are not going to be affected much one way or the other by rate expectations.
Brian Martin -- Analyst -- FIG Partners
I got you, that's helpful. Most of my other stuff was answered. Just maybe one other thing, just going back to expenses for just one question, and that was, when you look at last quarter, there was the deferred cost you talked about being an impact obviously and then the infrastructure build which appears to be slowing or at least kind of being we missed a little bit, but would you consider this quarter's expense from made a pretty clean level? I understand you're still investing in the company and getting some benefit and the consulting side, but just where it sits today was more representative of a cleaner quarter from an expense standpoint, and how we think about it?
George Gleason -- Chairman and CEO -- Bank of the Ozarks
I would say yes, absolutely.
Brian Martin -- Analyst -- FIG Partners
Okay. All right, I think-
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Hey Brian, I would say professional fees will still a little elevated in the quarter. We would certainly hope that we can continue to pull those back down but they will likely be replaced with additional headcount and resources as we kind of swap the consulting and professional fees for personnel. But, I do think that the overall level loads of overhead is a pretty good starting point to this [inaudible] , yeah.
Brian Martin -- Analyst -- FIG Partners
Yeah, OK. I appreciate the call guys. Thanks.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
All right. Hey Brian, I like the quote on your firm's dialing note today. Thank you.
Brian Martin -- Analyst -- FIG Partners
All right. Thanks, George.
Operator
Thank you, and as a reminder ladies and gentlemen, if you'd like to ask the question over the phone, press star and then one on your telephone keypad. Our next question will come from Blair Brantley with Brean Capital. Your line is now open.
Blair Brantley -- Analyst -- Brean Capital
Good morning, George.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Hi, good morning, Blair.
Blair Brantley -- Analyst -- Brean Capital
Hey, just a couple of quick questions, everything else has been answered. Going back to paydowns on the purchase book, is that paydowns as expected or are expecting a 25 to $50 million drop each quarter, kind of where it's been trending or how should we think about that, and do you have net loan growth?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Yeah. Hey, Blair, this is a Tim [inaudible] , hard to predict obviously on those, but obviously our portfolio purchase loans is going down, so the dollar amount of that should go down, whether we have 10% per quarter or 12% per quarter paydown, I don't know that the percentage change declined, changes that much, but obviously the dollar amount of that change should decline as the portfolio decline.
Blair Brantley -- Analyst -- Brean Capital
Okay, great. Thanks. Then, just on the fee income side, was there anything that was non-recurring this quarter?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
No, not really, no. I mean, we're always going to have recovery from purchase loans, we're always going to have oreo gains. Those are all one-time in nature, but we have a lot of those will have been. So now, I think seems like a pretty good, pretty good run-rate.
Blair Brantley -- Analyst -- Brean Capital
So, even on the loan service and maintenance side of it, there's not, and that's just going to bounce around as well, a little bit?
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Well, we're getting more and more of those fees and the deals that we do today at RESG, so that has had a tendency to grow overtime, but nothing meaningful from a one time item in that particular line item.
Blair Brantley -- Analyst -- Brean Capital
All right. Great. Thank you.
Operator
Thank you, and I'm showing no further questions in the queue for now.
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Thank you guys for joining our call today. I want to point out that next Monday, we will be changing our bank's names, The Bank OZK, and as of Monday, our stock will be trading under a new ticker symbol OZK. New name reflects both our rich history and our commitment to being the leader in technology and innovation as we continue to grow our company and we're looking forward to moving forward very positive way under the bank OZK banner. Thank you. That concludes our call. Thank you for joining us. We look forward to talking with you next quarter.
Operator
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a good day.
Duration: 67 minutes
Call participants:
Tim Hicks -- Chief Administrative Officer and Executive Director -- Bank of the Ozarks
Ken Zerbe -- Analyst -- Morgan Stanley
George Gleason -- Chairman and CEO -- Bank of the Ozarks
Catherine Mealor -- Analyst -- KBW
Timur Braziler -- Analyst -- Wells Fargo Securities
Tyler Vance -- Chief Operating Officer and Chief Banking Officer -- Bank of the Ozarks
Jennifer Demba -- Analyst -- SunTrust
Stephen Scouten -- Analyst -- Sandler O'Neill
Arren Cyganovich -- Analyst -- Citi
Michael Rose -- Analyst -- Raymond James
Greg McKinney -- Chief Financial Officer and Chief Accounting Officer -- Bank of the Ozarks
Brock Vandervliet -- Analyst -- UBS
Matt Olney -- Analyst -- Stephens
Brian Martin -- Analyst -- FIG Partners
Blair Brantley -- Analyst -- Brean Capital
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