Bank OZK (NASDAQ:OZK) Q4 2023 Earnings Call Transcript

Bank OZK (NASDAQ:OZK) Q4 2023 Earnings Call Transcript January 19, 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: Thank you for standing by and welcome to Bank OZK’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Director of Investor Relations and Corporate Development, Jay Staley. Please go ahead.

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. Please refer to our earnings release, management comments and other public filings for more information on the various factors in the business 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, Latif, to remind our listeners how to queue in for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Stephen Scouten of Piper Sandler.

Stephen Scouten: Hey, everyone. Good morning. So impressive NII growth again this quarter, and I know you guys have talked a lot about this kind of horse race that will be occurring with average earning asset growth versus NIM compression moving forward. I am kind of wondering, as we look out into 2025, which I know is hard to project, but how you kind of see that potentially playing out based on projected rate cuts and kind of how that dynamic should occur as we look further out? And presumably, I guess, to your guidance, RESG repayments accelerate a little bit?

George Gleason: Stephen, we hadn’t anticipated, you asked starting off with a question about 2025. But I would – what I would tell you on that, and of course, the answer is tremendously dependent upon Fed action. But our approach in our budget and planning for this year is that we are likely going to have three Fed cuts in 2024. And those are probably going to be July, September and November cuts. So we have taken a little more conservative view in line with the Fed’s guidance, ignoring the fact that the market has gotten a little further ahead on that. Assuming that scenario is correct, which is anybody’s guess and assuming that we have another further 4 Fed cuts in 2025 or 5 Fed cuts in 2025, you’ll begin to have the floors kick in on the loans in 2025 in earnest and we will be effectively rolling over a large part of our deposit portfolio.

So we, while we think the horse race is fully in play every quarter in 2024, we’re generally thinking, if that scenario plays out, we are going to have a more constructive net interest income environment in 2025, even with a lot of RESG payoffs coming in there. So that’s our current thinking on it. But it’s – 2025 is quite a ways out and a lot of things going to happen between now and then.

Stephen Scouten: No, that’s right. Yes. And I assume like you said, we’ll start seeing that chart come back in your management comments with the floors and kind of how that protects your loan book. So that’s obviously very helpful. And then I am kind of curious around origination trends. I mean for those of us that aren’t in that real estate business on a daily basis and not seeing what you guys see daily, I think a lot of folks on this side would have expected more of a slowdown, but originations have stayed extremely strong. So I don’t know if, Brannon, you could talk about some of those dynamics, whether it’s competitive, whether it’s still an appetite for current projects or what’s keeping that maybe loan origination demand higher than some of us on this side of the world would have expected?

George Gleason: Brannon, go ahead.

Brannon Hamblen: Stephen, happy to answer that question. It’s a great question. Although coming off of record 13.8% sometimes get more – should be stronger. But we are so proud of what our team has done in 2024. You saw the number increase at the end of the year, and I would say that moving into Q1 we’ve got a decent pipeline there. But no, you’re right. There are a lot of different headwinds for originations. This year, I would say, from an equity confidence point of view, has been the lowest that we’ve seen in a long time. But that’s juxtaposed against a lot of capital that’s out there. We hear about funds that – fund managers out there are looking to start new funds and getting pushback from investors because they haven’t invested the funds they already have existing.

So their – but their reticence in the recent past has definitely shown up in the number of deals that have moved forward or a number of deals that have sort of been on the table and then pulled back. I think the positive trend that you see there for us is simply a result of what we talked about quarter in, quarter out around being built to be in the market every day, every year, every cycle. And our guys continue to benefit from their well-deserved reputation for execution in that space. And we continue to – when there aren’t nearly as many competitors on the field, you tend to get calls that you might not have received before. And our guys have done a phenomenal job of converting on new relationships, and obviously, loans with existing relationships.

So the pie has been smaller, without question. We are just able to take proportionately a larger slice of that pie with our team. And this year will be very interesting in terms of how things play out. But as we will talk about, and George has already alluded to in terms of our thoughts around rate moves, we would expect, given the amount of capital that’s sort of been sitting on the sideline needing to be invested, that with – if we continue to get some positive signs there, we’ll start to see that the number of deals in the market increase. Of course, competition could increase as well. But we, as we stated, believe that we could see being at or above the volume we had in ‘23 for the 12 months in 2024.

Stephen Scouten: Yes. And if I could squeeze in one last quick one, as you guys think about maybe passing the baton to some of these other loan categories and investments you have made in the bank through the last few years, is there a way to kind of stack-rank where the potential is, whether it’s ABL, CBS, like where you think the most potential is to kind of make that handoff in terms of growth in the longer run?

Brannon Hamblen: Sure. I think you mentioned ABL those guys had another good year. We expect that they will have another good year coming at us. I would tell you that our lending groups, no surprise, have been as focused as ever on deposit gathering relationships. And we have, I don’t want to say restricted, but that heavy focus has sort of narrowed the focus around what, for example, ABL has been doing. I think those guys have potential to really sort of, just in time might be an overstatement, but to really sort of open, just pick it up a bit more as we as we look at what RESG may be facing in terms of pay-down in 2025. So that’s a group that comes to mind. But right behind it, as you said, would be our Fund Finance and our Capital Solutions Group, continue to make progress.