Bank OZK (NASDAQ:OZK) Q1 2024 Earnings Call Transcript

Bank OZK (NASDAQ:OZK) Q1 2024 Earnings Call Transcript April 18, 2024

Bank OZK isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Bank OZK First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is 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.

Jay Staley: Good morning. I’m 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. 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; Cindy Wolfe, Chief Operating Officer. We will now open up the lines for your questions. Let me now ask our operator, Abigail to remind our listeners how to queue in for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions]. One moment for our first question. Our first question comes from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.

Stephen Scouten: Yes. Thanks everyone. Appreciate the time. Great quarter here again. I really appreciate the addition of Figure 30 in the management comments showing the loan floors and kind of help — how that helps protect the NIM. I’m curious if you guys have done any sort of sensitivity around that to kind of frame up the magnitude of potential change that could happen there on a quarterly or yearly basis as we continue to be in this higher for longer environment and you add new loans. I mean you talked a lot about that, but I’m wondering if there’s a way to frame up the magnitude of benefit moving forward.

George Gleason: Stephen, we don’t disclose anything on that, but our regular Alco runs that we do certainly provide that information to management, and we don’t disclose that because we run large numbers of those runs in various rate scenarios and so forth. So we feel — I would tell you, we feel very good about our position there. Obviously, as we said in the management comments, higher for longer at current rates is an excellent scenario for us. It gives us time to reset that floor. And it also keeps repayments at a fairly muted level, both of which are very helpful to us from a net interest income perspective. Obviously, as we also said, the management comes higher for longer is hard on some of our borrowers. So we believe any incremental credit costs are far more than outweighed in that flat rate scenario by the additional net interest income that we earned.

So we view that as a net positive higher for longer. Obviously, we are pleased that expectations for cutting rates seem to be getting reduced a little bit. We view that as a scenario that will be constructive for us at a later date when we’ve had more opportunities to reset floors. So we would just assume the Fed stay where they are, and cut rates mid to late next year if they cut rates. And obviously, if the tail risk of higher rates come into play, that would be very beneficial for our net interest margin, but that incremental benefit would probably be offset by the higher provision expense that our models would roll out. So hopefully, that’s helpful to you.

Stephen Scouten: It is — very helpful. And as I’m looking at Figure 17 kind of where you showed the various tranches of credit size within RESG. It seems like especially this quarter, but really for the last couple of quarters, the additions have largely been coming in the lower — at the lower end of that spectrum, more so in the 0 to $125 million, which granted, that’s the Lion’s share of the credits anyways. But I’m curious if that’s an intentional move from you guys to kind of focus on those smaller, slightly more granular credit function of market dynamics or what might be at play there?

George Gleason: We’re still open to any good piece of business of any size. And I think it just is a reflection of the fact that equity is finding probably more opportunities to put together deals that make sense to the equity. And hence, we’re seeing requests for loans toward that smaller. And there are some larger transactions percolating through the pipe that may or may not get to a closing at some point in time. But yes, the deal sizes we’re seeing from the sponsors are probably leaning a little smaller than what we have in the past. And that’s just a reflection of what makes sense in the economy for the sponsors today.

Stephen Scouten: Got it. Got it. Okay. And then just lastly for me, I mean, we’re seeing a lot of negative headlines and optics around office. And you guys are pretty well insulated. One, from a loan-to-cost perspective, obviously, and the newness of your projects. But I’m wondering if you could speak to the dynamics you’re seeing from like a capital supply perspective, similar to what you guys were able to do in the great financial crisis, where if a loan did for whatever reason, have some issues, other mezz providers or sponsors were able to step in. Are you seeing overall strength in terms of willingness to step in on maybe distressed products and overall capital in the system?

George Gleason: Brannon may have a better view on that than I do. Brannon, do you want to take a shot at that?

Brannon Hamblen: Sure. Sure. Well, you kind of — your question is focused on our existing portfolio, but what’s going on in the new — new side of the product is obviously there as well. I mean there are a lot fewer new projects going up, and that’s true across a number of property types, Stephen. Just returns much harder for equity hit and fewer deals coming to market. But there’s a strong data behind the proposition, the product that’s call it, 2015 Vintage and later has such a material advantage over the older Vintage product that the capital flows will be focused more narrowly on that vintage, whether it’s brand new or constructed in the last five years as would be the case for most of our office portfolio. So — the quality of the product does materially enhance the likelihood that you’re going to see that support capital on an existing product in a portfolio.

We’ve had a number of situations over the last year where that has been the case. I think we’ll see additional situations over the next 12, 24 months where that will be the case. All comes down to quality and ability and our focus on best-in-class sponsorship and with demonstrable experience and financial wherewithal significantly improves the likelihood that those newly developed projects are going to be supported. So yes, it’s been the case. And from an opportunity in what we’ll call the distressed world. Obviously, that word carries a broad meaning, people are gathering data or gathering capital to enter that space from the outside of deals. Of course, we’ve got a lot of great capital providers in our deals at lower attachment points than the equity.