Bank OZK

Transcript of the Fourth Quarter 2021 Conference Call

January 21, 2022, 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;
  • Brannon Hamblen, President;
  • Greg McKinney, Chief Financial Officer; and
  • Cindy Wolfe, Chief Banking Officer.

We will now open up the lines for your questions. Let me now ask our operator to remind our listeners how to cue in for questions.

Catherine Mealor - Keefe, Bruyette, & Woods, Inc

I just thought we'd start with the margin and the level of minimum interest and other fees that we saw this quarter. I appreciate all the detail you gave about it in the management comments, but just trying to think about how we think about this next year. If you're saying that paydowns are going to be elevated until next year, is this a level of accelerated fees that we could still see into next year? Or is there really anything kind of one-time or temporary in the nature of what we saw this quarter?

George Gleason

Good question. And the answer is yes, no and all of the above. I think we had an exceptionally high level of minimum interest and fees on short-term renewals and extensions this quarter, that in the previous 3 quarters had been about $6 million a quarter, which is a pretty healthy rate itself, and jumped up to $22 million in the current quarter. So clearly, that was even $16 million over what has been a healthy level in the earlier quarters of the year. We expect good income from that sort of source in 2022 because we will have another strong repayment year. But more of those repayments are loans that are going more to their full natural term and getting back on a normal cycle. So it's very unlikely that we'll have a quarter that would approach the quarter just ended. And if we had the $6 million per quarter run rate for all of 2022, we would consider that a positive. So I think when you're trying to calculate your run rate as a starting run rate for our net interest income, you definitely need to take out that $16 million.

And then we mentioned in the management comments, Catherine, that we also had a really healthy level of PPP loan income, another $1 million-plus, in the quarter just ended. That's going to go away in another couple of quarters because we're just about through that PPP resolution collection process. And then our special assets guys did a fabulous job in the quarter, collecting a bunch of purchased loans, including some loans that have been charged off at or prior to those acquisitions and so forth, and fully collecting those. So we had a lot of interest income, another $1 million or so there. So really, I think probably our net interest income for the quarter just ended was $18 million or $19 million above what would be a more typical normal run rate for the quarter. Kudos to our staff, our special assets guys, for the great job they did in collecting a lot of those assets. We have a really gifted, talented special assets team and they deserve credit for that. Kudos to our government-guaranteed lending guys for the work they did on the PPP program and kudos to our RESG guys for their real expertise and very thoughtful and intentional structuring of loans so we can achieve those kind of minimum interest and payoff numbers. Those things are always nice to get. But we had an exceptionally good quarter of those in Q4, and it would not be prudent to bake those in any sort of run rate.

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Catherine Mealor

And then maybe a follow-up on that is just on core loan yields outside of that. If we back out PPP and the minimum interest, I'm getting a loan yield of about 5.28%. And you also mentioned in the management comment that new loan yields are coming in lower than where the portfolio is yielding today. And so any guidance you can give us on how big that gap is today and where kind of core loan yields may bottom before we start to benefit from a rising rate environment?

George Gleason

We're seeing new loans originated probably everywhere from, on an extreme low side, 2.5%, to 6% on the high side. If you look at that range, the new loans we're originating are at lower rates than the loans that are paying off. Now there's a flip side to that and that is that, as you can see on Page 15, I think it is, of our management comments document, a lot of our current loan portfolio will not reprice instantly when the Fed starts raising rates because the loans are at floor rates that are substantially above the formula rates now. And you can see we give you a very detailed table that shows how many loans are at their floors at every quarter point increase in rates, and that table is getting better and better. Those bars to the right are getting lower every quarter as we've replaced new loans with a formula that's very near their current floor with old loans that had floor rates that were much higher.

So the new loan portfolio that is being originated that's replacing the old higher rate stuff is more rate sensitive, and hence, we'll adjust more quickly when rates rise. So depending on how much and how fast the Fed raises rates, the fact that we're originating loans that today have a lower rate than the loans that are paying off, the Fed may help mitigate that by raising the rates on those variable rate loans, and the new ones are pretty much all right at their floor rate on the formula right now, so they'll adjust quickly. It's hard to know the timing of Fed rate increases. It's hard to know the magnitude of Fed rate increases. I'm hearing guys talk from 2 to 7 rate increases this year, but who knows. It's hard to know that.

But if we do get more Fed rate increases, that will help us mitigate the impact of the fact that newly originated loans have formula rates lower than the loans that are paying off with those floors. The other thing I would tell you is we're keenly aware that we've got to have more volume to generate more net interest income going forward, and our guys are doing a really good job on working their pipelines and creating good opportunities for us there.

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Timur Braziler - Wells Fargo Securities

It's nice to see the momentum building in RESG. Maybe talk a little bit about some of the broader trends you're seeing, which vertical that growth is coming from, kind of some of the larger metro cities starting to reengage and what the typical size of the product you're putting on today is?

George Gleason

All right. Timur, I'm going to let Brannon Hamblen take that question since he's on the front lines of that every day.

Brannon Hamblen

We've got some really positive trends, obviously noted in the results from Q4. And in terms of the "what" and the "where," it continues to be coming from all directions. In each of our LPOs, the guys are just doing a phenomenal job of getting out there and quoting and winning loans and some with sponsors that we've done a lot of business with and some we've never done business with. We've talked many times about the advantage our capital position gives us in terms of doing a lot with those we really like and reaching into other opportunities on different and even larger loans. And the guys are doing that. They're continuing to originate across the spectrum of size in terms of the "what." Multifamily is still probably the dominant property type, and life science, as we talked about a lot, was probably behind that in Q4.

After that, it's pretty evenly distributed across various property types. And in terms of the "where," we are seeing opportunities around, not necessarily in the middle of San Francisco, but in different directions from there as we're seeing a continual move of the "FAANG," big employment drivers moving out of the core, but near, and so we're benefiting a lot. A lot of opportunities in the Bay Area. We did some good business in New York in Q4 as well. We've commented on the New York portfolio and how it's been drifting down over time, but it's a very active market as evidenced both by payoffs we see there and new originations as well. Really, across the country, we're continuing to see really diverse opportunity and increasing volume of it as evidenced by our Q4 results.

George Gleason

Brannon, let me add and correct me if I'm wrong on this, but we're probably also seeing the broadest range of opportunities on larger mixed use projects that we've seen in quite some time and maybe ever. And we're looking at some loan opportunities that would be our largest loan opportunities ever, that we think we've got a good shot at getting in and getting closed. And that volume of really large complex mixed use projects that we're looking at could have some fairly significant implications for our volume later in 2022 and 2023.

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Brannon Hamblen

Absolutely the case. And as I've alluded to our continual and consistent strategy of keeping our capital levels where we are, I think that's going to come into play in a big way in the foreseeable future. And of course, those mixed use deals are the ones that tend to be the large ones that give us great quality, great diversity, great leverage levels and, of course, great sponsorship.

George Gleason

And I would also add to that, Brannon mentioned that the Bay Area has been a significant source of growth. We're also seeing some really excellent opportunities in Southern California, the L.A. and San Diego area, and, of course, continue to have a lot of opportunities in Florida. The portfolio is just getting more diverse. With New York coming down in volume, and I think you'll see New York at some point in this next year possibly begin to turn back north in volume, you're going to see us do some nice originations there for sure in New York. We've got a lot of paydowns coming in New York. So it's going to be a horse race between the originations and the paydowns to flip that one. But we're doing much more business in all sorts of other markets across the country. And there's a table that we put in a few quarters ago in our management comments just to kind of highlight the number of MSAs in which we operate and the growing diversification of the portfolio. We think that's a real positive thing as well.

Timur Braziler

And then maybe just adding to that, I noticed in the management comments that the expectation for originations in 2022 is to outpace 2021, but noticed that you stopped short of expecting a record there versus the expectation for record payoffs. Is that conservative just given the timing of some of these transactions? I guess maybe if you could put any kind of parameters on that, that would be great.

Brannon Hamblen

Timur, yes, what I would say about that is that as we sit here today, we definitely expect a strong origination year for 2022. But there are a lot of factors that would cause us to not want to get out over our skis in terms of what could happen 6, 9, 12 months away. But as we sit here today, and I'll just stick with the script, it's going to be strong origination volume. And we really saw a build last year that's continued. It's not weakened. We have the payoffs that we project are a natural maturation of the portfolio and those things would probably happen. So I'm going to stop short of saying any records in originations next year, but I like where the year shapes up for us right now based on especially some of the things we talked about in terms of new opportunities and markets that are really opening up, sponsors that we've not done business with before that the guys are signing up, and loans of size. Between the velocity and the size, new opportunities, new originations in 2022, we're feeling very positive.

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Bank OZK published this content on 22 January 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 22 January 2022 05:33:07 UTC.