Bank OZK (NASDAQ:OZK) Q1 2023 Earnings Call Transcript April 21, 2023
Bank OZK beats earnings expectations. Reported EPS is $1.41, expectations were $1.38.
Operator Good day, and thank you for standing by. Welcome to Bank OZK’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.I would now like to hand the conference over to your speaker today, Jay Staley, Director of Investor Relations and Corporate Development. Please go ahead, sir.Jay Staley Good morning. I am Jay Staley, Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session.In today’s Q&A session, we may make forward-looking statements about our expectations, estimates and outlook for the future.
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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; Brannon Hamblen, President; Tim Hicks, Chief Financial Officer; and Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions.Let me now ask our operator Norma to remind our listeners how to queue in for questions.
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Question-and-Answer Session Operator Thank you. [Operator Instructions]
Our first question comes from Timur Braziler with Wells Fargo. Your line is open.Timur Braziler Hi. Good morning, everyone.George Gleason Good morning.Timur Braziler Starting on the land loan that was moved into OREO, I guess, what’s the price at which that loan could be sold at today?
And I’m wondering, putting it in OREO with the appraised value of 100, why not use the sale value today as kind of the basis for that loan?George Gleason Brannon, do you want to talk about that credit?Brannon Hamblen Sure. Timur, thanks for the question. We’ve talked about the credit last quarter and described the credit for you. I would — in specific answer to your question, we obviously had the appraisal originally at 139 in June of ’21, had another one more recently at a 100.4. As to where we book it, look at the end of the day, the basis is known by our notices out there. So in terms of where we come in there, that’s going to be affected by that. That’s a — it’s a great site. We feel very good about our ability to market that site over the next year or two.
And as we said, feel good that we’ll have little if any loss associated with that.Timur Braziler Okay. Thanks for that. And then maybe looking at the continued strength on the lending side, would just love to hear your thoughts on the plan for funding in the rest of the year and then maybe just talk through what the incremental spread on the loan production in 2023 looks like.George Gleason Let me take that, Timur. The prospects for continued loan growth look pretty good to us. Obviously, we reiterated our guidance for RESG originations that we gave in the first quarter. Our first quarter results were very consistent with that January guidance and we think that continues to be good. We’ll continue to enjoy diversification and growth. All of our units contributed to some degree to our positive loan growth in the quarter just ended.I’m not sure they’ll all be positive every quarter, but over the course of the year, I would expect all of them to be positive contributors to loan growth.
And we’re continuing with our underwriting and application process, origination process, totally business as usual here. There have been no adjustments because of the economy and we continue to do business as we did in the great recession and the COVID pandemic and other times of economic stress.We just continue to do business with quality sponsors on quality projects on terms and structures that make sense and we’re always there for our customers. So we expect good origination volume throughout the year certainly off the record pace of RESG originations last year, but consistent with that 2021 level of RESG origination with good contributions from other groups.On the deposit side, as you saw in the quarter just ended, we had good deposit growth, 3.6% growth in deposits, not annualized.
That was organically through our branch networks. Most of our deposit growth comes from our 229 branches in Arkansas, Texas, Georgia, Florida, and North Carolina. We expect those branches will continue to fund that growth going forward in the remainder of the year. We’ve not had any changes in our deposit gathering strategies or adjustment.We will not become more reliant on wholesale deposit sources, don’t expect to do so. So we’re driving that with organic branch deposit growth and we feel very good about the prospects for that. Now, as you saw, our deposit costs were up, because we are generating a lot of growth through those branches and you’ve seen most banks have negative — that have reported that I’ve seen at least has had negative deposit growth numbers.We had massively positive deposit growth numbers because we’ve got growth in our business that we made growth in deposits to fund it, so we are paying for that.
So our deposit cost probably rose in the upper half of banks in the quarter, but our net interest margin increased nicely. And we’ve got a nicely balanced balance sheet between variable rate loans and our cost of deposits that’s letting us offset that and still generate very nice returns. And of course, we already have an industry-leading net interest margin by a wide distance from our competitors and that’s a very nice thing to have.Timur Braziler Great. Thanks for that color. I’ll step back.Operator Thank you. One moment for our next question. Our next question comes from the line of Stephen Scouten with Piper Sandler. Your line is now open.Stephen Scouten Hey, good morning.George Gleason Good morning, Stephen.Stephen Scouten George, you look good on Bloomberg yesterday.
Well done.George Gleason Thank you. Not to be there. Although, I don’t think I probably look good anywhere. I’m a little old to be good.Stephen Scouten Well, it sounded good either way.George Gleason Thanks.Stephen Scouten Well, I’m curious as you think about your new loan production, I mean, you just spoke to having to pay up for deposits because you guys are in the enviable position of having some good growth. But how do you think about the spread you manage to on that kind of marginal cost of deposits in your new loan growth and kind of how you think about that marginal spread versus your current NIM?George Gleason That’s a great question, Stephen. It’s a constant debate on every transaction. I’ve got an opportunity that landed in my inbox late last night or early this morning that I was looking at what kind of work this morning that certainly has a question.
One of those questions, it’s a piece of business you’d love to do and the quality is great, but you’re looking at it and the spread is just not what you would want to see versus our marginal cost of deposits.So I’m going to sit down with Brannon and the lenders involved in that transaction after this meeting and we’re going to parse that out, looking at the other opportunities that that relationship will generate the deposits that will come with it if there is any cost on those deposits, the magnitude of that, and just go through and do that got rich thing you do a thousand times a quarter of making a value judgment is there enough returns and long-term relationship building value to that relationship to do that. So we do that all the time.And, I think we parse that out pretty well for our shareholders and our customers as well because we have a lot of customers that want to do business with us as evidenced by the fact that our loans are growing and our deposits are growing and we generate a really good return for our shareholders as shown by our industry-leading net interest margin and return on average assets and efficiency ratio.
