Bank OZK (NASDAQ:OZK) Q3 2023 Earnings Call Transcript

Bank OZK (NASDAQ:OZK) Q3 2023 Earnings Call Transcript October 20, 2023

Operator: Good day, and thank you for standing by, and welcome to the Bank of OZK Third Quarter 2023 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 being recorded. I would like to introduce your host for today’s call, Jay Staley, Director of Investor Relations and Corporate Development. You may begin.

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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; and Cindy Wolfe, Chief Operating Officer. We will now open up the line for your questions. Let me now ask our operator, Justin, to remind our listeners how to queue in for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Stephen Scouten from Piper Sandler Companies. Your line is now open.

Stephen Scouten: Hey, good morning, everyone. Great quarter here. I’m curious, it looks like in the management comments that you’re guiding to a pretty strong origination growth in the fourth quarter. And I’m wondering if you could give some comments there. I would assume that’s occurring as some of your competitors may be pulled back from the space? And obviously, that’s been a time when you guys have done really well. So, just curious, kind of, if that’s what’s happening today and kind of where you’re seeing the pickup in originations category-wise?

George Gleason: Brannon, do you want to take that one?

Brannon Hamblen: Be happy to. Stephen, great to talk to you. Thanks for the question. That is in part some of the explanation. It’s been an interesting year as we’ve seen generally a slowdown in the number of projects that we’ve seen that would differ from region to region. As we’ve said a number of times through the year, the Southeast region has remained strong, certainly relative to other regions. And even certain periods of time in the Southeast. So we continue to see very good activity in that region and over into Texas and the Southwest. But yes, despite the slowdown in the number of deals that are out there, there’s also been a pullback from some of our competitors out there. And we have, as time gone on, continued to press down on leverage, try to expand on spread.

So, and all the time, stay very true to our disciplined approach to origination. But with — in many cases, fewer competitors out there were able to still close a number of deals, great deals with improved leverage and pricing metrics. So in terms of the what, continued theme would be multifamily and industrial. We’re closing other types of loans. I think I’ve mentioned a couple of times over the last few quarters that are our Atlanta office that covers the Miami market is seeing a lot of opportunity in condos in the Miami markets. So we’ll see some opportunity there. But multifamily and industrial has been, for the most part, the big movers. We’ve had some good mixed use in there as well. But those are where we’re seeing a lot of opportunity.

Stephen Scouten: Great. And Brannon, I appreciate that. You spoke to spread there. What are you, and I know every credit is obviously different, but what are you seeing on new loan spreads kind of relative to the incremental funding cost? And I guess you would feel based on that growth that you’re getting paid well and compensated well on this new loan production?

Brannon Hamblen: Absolutely. We’ve talked about how our spreads differ pretty materially depending on the product type. But I would say that we’re ranging from sort of mid-ish 3s to up into the 4s depending on the product type and where it is.

Stephen Scouten: Okay. And then just last thing for me. Obviously, the RESG loans are staying on the books for longer. I’d assume this has been driving some of the, what I see as conservatism around the loan loss reserve, but how do you guys kind of speak to that pushback maybe from some market participants and say like, these loans staying around longer is a bad thing, not a good thing even though you’re earning more money?

Brannon Hamblen: Well, and George can weigh on this one as well. I think I would first point out that we’ve had more payoffs than we have had originations this year. So as we, as you can see from the numbers we reported, it’s not a significant increase, but they have been up every quarter-over-quarter and evidence of other capital out there in the market. They’re paying off with refis. They’re paying off with sellouts or sales of income properties from developer to a new owner and even have some situations that the borrower come into a lot of cash and just pay us off in that method. But as you noted, we don’t mind having the earning balances on our book and are getting paid well for those loans. So, look, with rates doing what they’ve done, we’ve known we were going to have a slower repayment volume, but it has been, a repayment volume continues to be.

There’s still people in the market with capital. So we’re not surprised, and I would say on the whole, pleased to see the payoffs continue to come in, in the numbers that they do.

George Gleason: Stephen, let me clarify just for our listeners who don’t price loans all the time. Brannon said that our spreads typically in the RESG portfolio, I think he said we’re ranging in the — in kind of the mid-300s up into the 400s. And that references to a spread over SOFR — 30-day terms SOFR is what we use as the predominant index. So that’s a spread over SOFR. And I wanted to clarify that. We just talk about it as spread all the time, but there are a lot of different indexes and we’re referencing spread over 30-day terms SOFR. And a point that Brannon made is that our leverage points are coming down probably over the last two years, our loan-to-value, loan-to-cost ratios, quarter-to-quarter-to-quarter have had a generally down trend not every quarter, but we’re probably down 5 to somewhere between 5 and 10 percentage points on leverage now versus what was originated two years ago.

So that’s very favorable for credit quality. And I would just echo what Brannon said, we’re thrilled to death to have loans stay on the books longer, and a lot of times sponsors are quick to exit our loan to go to a cheaper permanent loan solution. Sponsors are being very reticent about trying to figure out where their best exit is refinance wise. So that’s keeping the loans on our books and our higher yield construction loans longer. Our leverage points are low. So we’re very happy to have those loans on the books for an extended period of time.

Stephen Scouten: Yep. Makes sense to me. Appreciate the color and congrats on all the success, again.

George Gleason: Thank you.

Operator: Thank you. And one moment for our next question. And our next question comes Manan Gosalia from Morgan Stanley. Your line is now open.

Manan Gosalia: Hey, good morning. So maybe just as a follow-up to that question. As we think about growth in funded balances over the next few quarters, I think this quarter, you had about $1.4 billion increase. Is that a good run rate to consider as we go through 2024?

George Gleason: I don’t know that we’re willing to lock in on that guidance. Manan, we expect good growth over the next year, but we’re not giving specific guidance on that for the year yet or for the quarter. We’ll, probably in our January call give some specific growth guidance on total loan expected growth in 2024. We expect it to be a nice growth here, but I’m not ready to lock in on a number yet.