Disciplined. Aggressive. Gleason

In 1979, George Gleason II, then a young attorney a couple of years out of law school, decided to try his hand at banking. So the 25-year-old Arkansas native made a bold move: Using his family’s ranching business as collateral, he bought a controlling interest in what was then known as Bank of Ozark, a $28 million asset financial institution located in rural northwest Arkansas. On just his second day as the bank’s chief executive, he told his staff that while the bank might not ever be the biggest in Arkansas, “we could strive to be the best bank in Arkansas, and we could strive to do everything that we did to the highest level.”

Gleason’s speech to his staff more than three decades ago seems downright prophetic today: Little Rock-based Bank of the Ozarks Inc. isn’t just the best bank in Arkansas. It’s the best midsized bank in the country, earning the top spot in the $5 billion to $50 billion asset category in Bank Director’s 2015 Bank Performance Scorecard, which this year ranked the 300 largest publicly traded U.S. banks.

The annual Scorecard ranking splits publicly traded banks into three asset categories: big banks, with more than $50 billion in assets; midsized banks between $5 billion and $50 billion; and community banks between $1 billion and $5 billion. Once sorted into their appropriate asset category, the banks are ranked based on profitability, capital adequacy and asset quality for the 2014 calendar year. Ozarks is listed as having assets of $6.8 billion in the ranking, but has grown to $8.3 billion since the close of last year. (For the complete results, please see page 20.)

The success of Gleason and his Ozarks team isn’t a flash in the pan. Bank Director named Ozarks the top-ranked community bank in 2013 and 2014, and in prior years Ozarks consistently appeared near the top of the list.

“I’ve covered the banking industry since 1999, and I’ve covered a lot of banks,” says Jennifer Demba, managing director at SunTrust Robinson Humphrey. “[Gleason] is certainly one of the most intelligent, energetic, [and] resourceful gentlemen I’ve ever met, and his work ethic is probably unparalleled.”

Bank of the Ozarks has never posted a loss since becoming a public company in 1997, and for all but three of those 18 years has reported record earnings. Gleason strives to grow organically by 25 percent annually—an aggressive goal—and also expects the bank to rank within the top 10 percent for net interest margin (NIM), efficiency and asset quality. Ozarks performed better than the industry average in all three categories at the close of 2014.

Gleason believes in setting a high bar. “One of our goals is to be the top bank in the country every year,” says Gleason. “A tradition of excellence tends to result in excellence.”

“George has always been a super smart and aggressive guy, and he has taken that bank, which at that time, when I met him, was just a tiny little bank, and grown it into what it is today,” says long-time Ozarks board member Bob East. East owns a construction company, which he started around the time Gleason took over Ozarks, at about the same age. Early in their careers, East partnered with Gleason on several construction projects in downtown Little Rock, and built a few of Ozarks’ branches before joining the board in the mid-1990s, when the bank went public.

Bank of the Ozarks topped this year’s Scorecard in large part due to a high level of profitability, ending 2014 with a 2.13 return on average assets (ROAA) and 15.97 return on average equity (ROAE). The bank balances this profitability with a lot of capital—12 percent tangible common equity to tangible assets. “We’re achieving significant organic growth as well as growth through acquisitions,” says Gleason. “So that capital cushion that we have affords us the ability and the latitude to achieve the significant growth rates we’re trying to achieve.” Ozarks’ ROAA has exceeded 2 percent since 2010, much higher than the industry average. “That strong earnings performance has allowed us to generate a very good return on equity, even with our high capital ratios,” says Gleason.

Nonpurchased loans and leases grew by a record 51 percent in 2014. While this approach to growth may seem almost excessively aggressive, it’s also highly disciplined. “What we try to do in every market we serve is make every good quality, good yielding loan we can make,” says Gleason. “When we reach the point [where] we’ve made every good loan we can make, and there’s not another loan you can safely make in that market, then we want to stop making loans until we find the next good line.” The bank’s diversified asset mix across a wide geographic base protects the bank against economic swings. Most of Ozarks’ $3.98 billion loan portfolio focuses on commercial real estate, but the bank also offers commercial and industrial loans, consumer loans and agricultural loans.

In short, Ozarks won’t lend to just any Joe Schmo that walks into a branch. Gleason found that having a lower loan-to-cost ratio than other banks helped protect the bank’s asset quality, allowing it to create opportunities during the economic downturn while other banks weren’t in the best shape to do so. The loan-to-cost ratio compares the loan value to the total cost to complete the project, not the fair market value. The lower the ratio, the less risky the loan. At the end of 2014, construction and land development loans totaled $1.4 billion, making up 40 percent of Ozarks’ real estate loan portfolio. “After we went through the Great Recession and realized, wow, having a lot of equity really helps, we said let’s get even more equity going forward, so that we’re even in a better condition in the next economic downturn,” says Gleason. Bank of the Ozarks’ average loan-to-cost ratio for its commercial real estate loans was 54 percent at the end of 2014, down more than 10 percentage points from five years ago. Its average loan-to-value ratio for commercial real estate loans also dropped, from 57 percent at the end of 2009 to 45 percent at the close of last year, an indication that its deals have more equity in them today.

Borrowers with more skin in the game are less likely to default on their loan, and Gleason only underwrites the cream of the crop. It’s the bank’s focus on quality lending with a higher percentage of borrower equity that helped it weather the financial crisis with a better-than-average net charge off ratio, which peaked at 1.75 percent in 2009, despite the high concentration of commercial real estate loans. “They’re cherry-picking the best deals, which gives them the best credit,” says Brian Martin, vice president and research analyst with FIG Partners LLC. “That’s the kicker. If you’re getting that much equity in [a] deal, the borrower’s less likely to walk away.”

East describes Gleason as a banker with a meticulous approach to lending. When Ozarks was smaller, Gleason spent four hours daily—including weekends—reviewing loans to ensure they were as carefully underwritten and profitable as possible. He reviewed thousands of loans gained through the bank’s seven FDIC acquisitions. Gleason “gets a half a point here, or a small fee there, [a] better term here, and he’s always looking for the best deal he can do,” East says. “He’s a great asset manager, and he demands asset quality.”

Ozarks ranked lower for asset quality than several other institutions in the Scorecard, at 39th for net charge offs (0.09 percent) and 42nd for nonperforming assets (1.14 percent), but these ratios still fall below industry averages for institutions insured by the Federal Deposit Insurance Corp. (FDIC).

Gleason is no less aggressively disciplined when it comes to the bank’s acquisition strategy. Ozarks was one of the most active banks participating in FDIC-assisted deals during the financial crisis, beginning with the March 2010  acquisition of Unity National Bank in Georgia. But East says the price has to be right.

“We bid on a lot of banks,” says East. Ozarks acquired seven banks through the FDIC, but East estimates Ozarks bid on roughly five times that number. “[Gleason’s] not going to overpay for a bank.”

Ozarks first expanded outside of Arkansas in 2001, with a Charlotte, North Carolina loan production office. It launched a de novo branching initiative soon thereafter, opening seven branches in Texas from 2004 through 2009. A string of FDIC-assisted deals in Georgia, Florida and South Carolina in 2010 and 2011 kicked off the bank’s acquisition drive and greatly expanded its footprint in the southeastern U.S. Ozarks has since acquired six more healthy banks, broadening its reach in Texas and expanding to Alabama, North Carolina and New York. (The bank’s organic growth strategy resulted in new loan production offices in several southeastern states, as well as Los Angeles, in 2014.)

If one were to place pins on Gleason’s acquisition map, all of these purchases over the past few years might appear a bit haphazard. Don’t be fooled. Gleason knows what he wants out of a deal.

“We’re very open minded in regard to geography,” says Gleason. “What we’re looking for is earnings power.”  And while leapfrogging the bank’s footprint across several states might seem to build costly inefficiencies into Ozarks’ operating structure, Gleason says he factors in those higher costs. “We’re looking for the best financial outcome,” he says. “We have passed on a multitude of transactions that appeared very logical when you just looked at the overlaying maps of our branches and their branches, but would have in reality produced very subpar returns.”

“He can make a lot of deals work that maybe other people can’t,” says Demba. “He’s agnostic in terms of geography, and that can offer him a lot better valuation on his deals.”

How a purchased bank fuels the Ozarks earnings engine may differ. Gleason may be looking for a good deposit base, a growing market or a new platform for generating revenue. “It all depends on our ability to take the various pieces of the franchise that we acquire and fit them into our franchise in a highly profitable manner,” he says.

Arkansas is still home to more than 40 percent of Ozarks’ deposit base, but the bank’s organic and acquisition-driven expansion into Texas has been particularly fruitful. More than half of its loans were originated in the Lone Star State last year. Dallas serves as home base for the real estate specialties group, which focuses on commercial real estate loans. Additional offices are located in Atlanta, Los Angeles and New York, and in Texas, Austin and Houston. “We’ve made loans through that unit in 41 states, so it is a very sophisticated and geographically very diverse lending platform,” says Gleason.

This national focus on larger real estate loans sets Ozarks apart from most banks of its size, says Martin. Larger, high quality loans help Gleason run a lean operation, with an efficiency ratio of 45.3 percent at the end of last year. (The FDIC reported an efficiency ratio of 61.9 percent for the industry for the same period.) Many banks rely on smaller loans that require more staff to handle the volume, but Ozarks is “putting more loans on the books with fewer people,” says Martin. The loans generated by the real estate specialties group also carry a higher yield. “[Gleason’s] got more loans than most banks, and he’s got better kinds of loans. A lot of cash equity, which gives you protection from a credit standpoint, and he’s got higher yields. The model works,” he says.

Bank of the Ozarks is approaching $10 billion in assets, and the bank’s meteoric growth means Gleason’s days of reviewing loan after loan are in the past. Today, one of his more important roles is to ensure that the Ozarks way of doing business is ingrained throughout the organization—no small task, considering the bank has completed 12 acquisitions in just five years. “When you acquire new teams of people, they don’t instantaneously adopt your culture. They’ve got to be shown how to do that, and shown the merits and the value of doing that,” says Gleason.

East says that Gleason recognizes and fosters talent while keeping true to the bank’s culture. “He’s a great leader. When we buy banks, he meets with the lenders in the banks, and they have a choice. They can either do it Bank of the Ozarks’ way or they can go somewhere else,” he says. “The whole bank is working toward that goal of being better than everybody else.”

In addition to a rigorous approach to lending, the Ozarks culture is predicated on a commitment to working hard and demonstrating, in Gleason’s words, “the highest standards of ethics, integrity and fair dealing.” For Gleason, what may seem like Mayberry-style values are essential for the bank to achieve that 25 percent annual growth goal. “People expect and want their banker to respond quickly and efficiently,” he says. “People want great service. People want to know that they can trust the banker that they’re dealing with, that the ethics are there, the integrity’s there, [and] the transactions are going to be fairly administered.”

Gleason “demands 100 percent honesty and a lot of hard work” from the bank’s employees, says East. “He expects them to work harder than other people, and he expects them to find better deals and give better customer service, and just do everything better than other bankers.”

Gleason works about 70 hours during a typical week. He’s been known to put in even more hours as the job demands it. Completing seven FDIC deals over a one-year span certainly required a considerable amount of his time. While many CEOs of high performing banks also put in long work weeks, Gleason may well have taken it to another level. He married his wife of 29 years, Linda, then a bank employee, during his lunch break. It was a Friday, so Gleason then returned to the bank to finish up the day before departing for a brief weekend honeymoon. He credits his wife for having “great patience and tolerance” for the demands of his job. Husband and wife both serve on the Ozarks board. “Hard work is a necessary ingredient to really achieving as much of your potential as you can achieve. So I work hard.”

Gleason doesn’t plan to hand over the reins at Bank of the Ozarks anytime soon. He acknowledges that he probably has a future leader or two already on staff, but he’s in good health, still loves his job and believes he’s the right person to lead Ozarks. Retirement isn’t on his mind. “As fun and rewarding and satisfying as it is to look back on all those things that we’ve accomplished, and all [the] people I’ve had the privilege of working with, I come to the office every day with the mindset that we’re just getting started,” he says.

And why leave now? Bank of the Ozarks continues to expand at a rapid clip. Its largest acquisition so far, $1.6 billion asset Intervest Bancshares Corp., headquartered in New York City with offices in Florida, closed in February. The acquired lending team focuses on stabilized properties—existing real estate property with a stable tenant income—which adds another niche lending operation to the bank’s asset mix. Another purchase, Bank of the Carolinas Corp., a $363 million asset bank holding company based in Mocksville, North Carolina, is expected to close in the third quarter.

Martin expects to see continued growth from Gleason and his team, both through organic loan growth and through acquisition. “They’ve built the infrastructure at that company to absorb a lot more growth over the next couple of years, so I would look for the company to continue to be very active,” he says.

Bank of the Ozarks is on pace to surpass the $10 billion asset threshold sooner rather than later, which will lead to greater regulatory demands and oversight. Gleason and his team have been preparing for that hurdle for years, making improvements to Ozarks’ processes, systems and staff as the bank grows. Recent updates to the bank’s technology infrastructure include a secondary data center and a new core operating system. These improvements should help the bank offer more products and services to customers, and serve them more efficiently. “It is critically important, if you’re going to be here 10 years, 20 years or 30 years from now and be successful, that you adapt your business model to meet the needs of your customers,” he says.

“One thing about George that I think it unique is [that] he plans ahead a lot more than other executives I’ve met. He thinks three years out, not one year,” says Demba.

Despite the bank’s rapid growth and national expansion in just a few short years, Gleason says the bank’s name won’t change. To Gleason, the Ozarks brand doesn’t just represent the bank’s historic base in the mountainous region in Northwest Arkansas. Ozarks represents the bank’s—and, by extension, Gleason’s—way of doing business. “[Bank of the Ozarks’] philosophy really hearkens back to a day when a man’s word was his bond, a day when our nation was more rural than it is today, and a day when people built deeper relationships,” he says. Those values mean more to him than the financial performance of the bank.

“I would rather our bank be the worst performing bank in the country, and to have gotten there with our integrity and our reputation intact, than to be the best performing bank in the country and to have gotten there by ill means,” says Gleason. “Fortunately, we’ve been able to do both.”