Bank OZK : 1st Quarter 2021 Earnings Release Conference Call

Bank OZK

Transcript of the First Quarter 2021 Conference Call

April 23, 2021, 10:00 am

Note: Administrative communications of the operator and other greetings and social exchanges of no substantial import have been omitted from this transcript.

Good morning, I am Tim Hicks, Chief Credit & Administrative Officer 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;
• Greg McKinney, Chief Financial Officer; and
• Brannon Hamblen, President & COO of our Real Estate Specialties Group.

To make the most efficient use of the time we have for this call, we'd ask that you please limit your questions to one or two at a time, and then re-enter the queue for any follow-up questions, if needed. We will now open up the lines for your questions. Let me now ask our operator, Joelle, to remind our listeners how to cue in for questions.

Ken Zerbe - Morgan Stanley

I was hoping you could actually talk a little bit about what drove the increase in non-purchased loan yields this quarter? Certainly, it was good to see those trending a little bit higher. And how sustainable is that increase?

Tim Hicks

We did mention in our management comments some additional recognition of fees from our PPP loans. There was about $3.6 million of that, from the forgiveness of certain loans, about $160 million of loans that were forgiven through the PPP process that dropped $3.6 million of previously unaccreted net deferred fees into income. That was about 8 basis points contribution to our yield on non-purchased loans. We'll obviously have that for a couple more quarters.

We have about $5.2 million remaining from PPP1 loans that have not accreted those fees, not accreted into income fully yet. And then we've got the PPP 2 program that obviously started this year. We've got a little over $100 million of loans that have been approved through that process. And that's got just under $5 million of fees related to that -- $4.6 million at March 31. So both of those will contribute some in the second quarter and future quarters as those get forgiven over their time periods.

Ken Zerbe

And then maybe just a little bit of a broader question. So in terms of competition from the nonbanks in the RESG portfolio, we've certainly gone through a period where the nonbank lenders should have pulled back on lending, given the increased credit risks and uncertainty in the market. But now that they're actually coming out of that period and things do look to be getting a little bit better, should we assume that competition from the nonbanks really starts to pick up again from here? And what does that imply as you're thinking about growing the RESG portfolio going forward?

Brannon Hamblen

I think we're all very aware of how much liquidity there is in the marketplace right now, and your assumption or understanding is correct that there is sort of the reawakening coming out of the COVID-19 pandemic. But I would say that, that's not unlike other periods that we've been in, in the past. We have faced significant competition -- late '17, early '18 was certainly a very competitive time period. And we have continued to be able to, in the face of doubling or tripling of the debt funds out there, continue to produce really good volume. So yes, there are going to be more folks out there. But oftentimes, not groups that have the depth of experience and history with a lot of the sponsors that we do. So we expect a competitive environment but expect to compete very well.

Brock Vandervliet - UBS

We could maybe shift over to deposit trends. I thought figure 48 was great in terms of the disclosure. But if you could just speak to that in terms of the consumer commercial areas down, brokered public funds still heading up, what should that look like? What do you like that to look like in the coming quarters?

George Gleason

Brock, we've been working very hard over the last couple of years and really improving the quality and diversity of our deposit base. And our top 10 depositors now account for something roughly in the range of 7% of total deposits, where they use to be high teens or even higher at one point. So we have a very diverse deposit base. We have no aversion to using brokered deposits or public funds deposits, but we certainly want to keep those levels at a manageable level.

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And we're seeing really good acquisition on consumer and commercial business accounts and expect that to continue. And that is our primary focus to just build a greater and greater core nucleus of customers on the consumer small business side, established more connections to those customers by having more product connections and delivering to them services that make them more sticky and more dependent upon us to provide services to them.

And Cindy Wolfe, our Chief Banking Officer; Carmen McClennon, our Chief Retail Banking Officer; and Ottie Kerley, our Chief Deposit Officer, have just been doing a marvelous job with their respective teams -- and continuing to improve those initiatives - mobile and online banking are big parts of that. We've had several upgrades in our mobile and online banking technologies and products over the last year or so, that has really been a big part of our story and will continue to be an important focus for us. So we are very pleased with the way things are going on the deposit front. And we know that it's not a one and done, or five and done, or 10 and done sort of deal. It's a continuous focus that you've got to maintain -- and the guys are trying to improve it every day, and I think are really doing a good job.

Brock Vandervliet

And as a follow-up on RESG, just if you could talk about the guidance going forward. It sounds like we should expect a ramp-up, at least on originations later in the year.

Brannon Hamblen

Yes, Brock. I think we've laid out for you what we expect on the pay down side, and we're still expecting to have significant impact there, at least in Q2, and, hopefully, that levels out. But in terms of originations that we can fight that battle with, we're pleased with the pipeline that we're seeing today. We're already in Q2 here. We've already closed 8 loans. It's one of the stronger starts a quarter I've seen in a while.

So as I said before, the guys are fighting hard and not being deterred by the fact that they're having to work on some smaller loans and getting all of those that they can. And I would say that we noted that a large part of the difference between Q1 2021 and Q1 2020 was just not as many of the large mixed use deals and some of the bigger metropolitan markets that we typically have a lot of business in.

We're available. We are starting to see that trend reverse as the country comes out of its COVID-19 induced stupor. And as that has been occurring, the guys are starting to see some of those that they've been tracking and expecting to come to the market, start to do that. So quarter to quarter, the world can change, but we see the trend

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as positive and would hope that towards the back half, a lot of these deals that are coming to market today or back half of 2021, or early 2022 deals, but we're encouraged at what we're seeing there.

Timur Braziler - Wells Fargo Securities

Following up on some of the commentary on RESG. I understand the record level of payoff activity as some of that pent-up demand from last year is accelerating in the first half of this year. But I wanted to talk again on your comments on the heightened competition and some of the headwinds that is producing. I guess as you're looking at the competitive landscape, are you seeing those pressures on the pricing side? Are you seeing those pressures on the structure side? And as you get into the back end of the year, is it really the pipeline that you're seeing today that's giving you optimism that you can outgrow some of those competitive pressures? Or should we expect to see the competition ramp up as the reopening more broadly continues to take place?

George Gleason

Since Brannon already answered it, let me answer it and provide reinforcement, I think, to what Brannon said. And #1 is, as Brannon observed, we're always in a very competitive environment except for times when everybody else pulls back from the market as we saw in the late first quarter and second quarter and early third quarters last year when everyone else sort of disappeared. For the most part, we were still out there, and very reminiscent of the experiences in the Great Recession when everyone disappeared from the space, except us pretty much.

So barring those exceptional times where all the visitors leave and we who are in the space all the time are still out there, we see a lot of competition. And this comes and goes, and it's from different competitors, from different angles of attack, at different times. So the competition is nothing new. And as Brannon pointed out, our guys are doing a great job of finding transactions that meet our standards as evidenced from the fact we closed about twice as many loans in RESG in Q1 of this year than we did in Q1 of last year. They were just 60% smaller, more or less, than the loans we closed on average last year. So the guys are doing a really good job. Competition is part of our business. And as Brannon said, our expertise and ability to execute are always the distinguishing attributes that seem to win the business for us.

And certainly, we're going to be leaning heavily on those relationships. Our proven track record of being reliable and executing well and having expertise in the space to win business going forward. And those distinguished characteristics have been invaluable to us in the past in winning business, and we think they will be in the future.

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We do see a healthy pipeline emerging for the second half of this year and next year. And that is the source of our optimism and our experience in the space. And you asked the question, was it competition based on credit, or is it competition based on pricing? And I would say yes and yes to that. What we've said this multiple times over many years is we will not give on credit, we'll not sacrifice our credit quality to get business. That's absolutely non-negotiable. We will negotiate some on pricing as long as it achieves our minimum return standards. So yes, we are seeing some pricing pressure, and we're certainly not getting as good a yield on loans originated this year. And in the quarter we're in now, as we probably did on loans originated in the second quarter of last year when everyone was absent from the space. But they're still going to meet our return standards. And if they don't, we're not going to do them.

Timur Braziler

And then my follow-up, just looking at the community bank, and the optimism for that to grow in the back-end of the year. Can you just maybe talk about where that growth is coming from? I know you referenced that you brought on a new ABL team, and that's going to start contributing. I'm just wondering how much of that growth is going to be from reengagement in the Indirect RV and Marine space and then also to the ABL point, how much of that should be contributing in the back end of the year?

George Gleason

When we refer to our Community Bank, we're not referring to our Corporate Business Specialty Group for ABL or indirect groups. The corporate and business specialty group and ABL group that we're building, those report under Brannon Hamblen. The Indirect RV & Marine group reports to Alan Jessup, who is over our Community Bank Group as well, but we really consider that a separate unit from the Community Bank group.

So we are hopeful to see an increase in growth, and we've got a good pipeline of transactions we're working on in Brannon's world. On the Corporate and Business Specialty Group side, that's an area we think we get some growth over the back half of this year, really, and into next year. We're excited about this new ABL business and the leadership that we've hired for that. And then our Community Bank team under Alan Jessup -- those guys seem to have some growing momentum. Now they had net payoffs, obviously in Q1. And they'll have another challenge with payoffs in the second quarter. But their pipelines seems to be getting better, and they seem to be getting more optimistic about their ability to win business out there. So we are encouraged about prospects across the board for growth in the back half of the year and in 2022.

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