Bank OZK Q3 FY2024 earnings call

Key managerial messages include discussion on NIM factors such as Fed rate moves, CD yields, and floors; expectations for loan growth with mid- to high single digits in 2025 and the handoff of RESG to CIB; asset quality updates including progress on various projects and sponsor support; details on the CIB build-out, including loan syndications, interest rate hedging desk, and deposit opportunities across different verticals; and credit analysis of loans, emphasizing sponsor support and risk assessment.

Management expects mid- to high single-digit loan growth in 2025; NIM expectations considering Fed rate move scenarios; CIB build-out with expectations of growth and contribution to OZK over time; and cautious optimism about fee income contributors like mortgage and capital markets desks.

Risks include Fed rate moves impacting NIM timing and magnitude; prepayment of loans potentially affecting yields; asset quality risks with certain loans, especially in stressed commercial real estate segments; and uncertainty around provisioning levels for different loan segments.

Q: Hi, good morning, everyone. I Appreciate all the guidance in the management comments, especially the potential for NIM and selection in late 2025 I think was interesting. I'm hoping you might be able to give some color on kind of the puts and takes. Obviously a lot going on there. Maybe talk up a little bit about the CD yields on repricing and beta expectations on the way down, kind of the impact of the floors and that lag effect you talk about on [10-1] (ph), and then sort of the potential drag on the NIM from the handoff of RESG to CIB and the other verticals. And just, you know -- that coupled with any debt maturities, just that holistic picture of the puts and takes around the NIM and what gives you confidence around that potential for inflection in the back half of 2025.

A: Sure. Thanks, Stephen. How you doing? Great. Yeah, I mean, a lot of different variables happening. Obviously, the pace of Fed moves is a big component on the timing and the magnitude of the changes in our NIM. The floors, we gave you a good schedule on our floors, when those are expected to be impacting our loan yields and those are on Figure 27. And then really the pace of the cost of interest-bearing deposits and how quickly we can reprice those. You can see that on Page 24, Figure 26, a big component of that is going to be our time deposit and the maturity schedule there. You can see $5.9 billion of time deposits repricing this quarter. The weighted average rate there is $5.19 billion. And you can see $6.2 billion in Q1, weighted average rate of $5.10 billion. So that's a big component. Currently, our current special is well below that 7-month CD $4.60 billion, 13 month CD at $4.25 billion. So as those come over and reprice, we've got a good opportunity to move down deposit costs pretty quickly over the next two quarters. And then you mentioned our securities portfolio having a pretty good impact of cash flow coming in Q1 and early in Q4 and a little bit in Q1, with a good amount of cash flow that's going to be repriced at higher yields, too. So a lot of different moving parts. The Fed moving, how quickly they move, really is dependent -- will depend on really the pace of our -- the impact of our NIM on the way down and the inflection point and hopefully, good result in the back half of next year. I mean our Fed assumptions assume a 25 basis point decline for the next six meetings. So if the Fed moves slower than that, then that's a good situation for us. The Fed moves quicker pace than that's more headwinds for us, if they move even after into the back half of 2025, we'll have more of our floors at one of our loans at their floors. We'll have more opportunities to reprice our CDs even more of that point. So that's not a bad situation for us either. So we feel like our guidance we've given is pretty good in a lot of different scenarios.

Q: Hi, good morning. I was just trying to think through the relationship between paydowns and floors and the impact that might have on NIM. As capital markets open up, more loans get paid down, is it more likely that some of the older loans that were made with lower floors get paid down first? Or that some of the more recent loans that were made with higher floors get paid down sooner, right? So I recognize that there is a prepayment penalty, but at some point with the 200 basis points of Fed rate cuts, does it become NPV positive for some of the people that have higher floors to pay down the loan and pay the prepayment penalty?

A: That's a good question and certainly a possibility, Manan. But what I would tell you is that our experience -- and Brannon may want to comment on this, but our experience is that customers have some degree of reluctance. It is not unprecedented and certainly not unheard of or impossible, but there's a degree of reluctance in inertia for customers to not pay off loans mid construction. Typically, where you get an early payout that generates some minimum interest on that credit is at the time that you've got the billing substantially complete and so forth. So most of these things will go to a full completion term. And if they don't go to the point that we would earn our target minimum return on equity will be protected by minimum interest. So that would actually be very favorable from a yield point of view. And I think your first part of that question relating to older loans with lower floors. Yes, our expectation is that we will have a higher level of older loans with lower floors payoffs as opposed to newer loans with higher floor.

Q: Hi, good morning. I noted in your loan outstanding chart, there was a shift out of construction and land development and into the non-farm non-residential more than we've seen in past quarters. Just curious what drove that shift? It was just a reclass or if there's any kind of change going on there?

A: Sure, Catherine. As we said earlier, there are really two criteria for moving from construction or moving out of the construction category. One is projects complete and has a certificate of occupancy and the loan structure includes a monthly amortizing feature. And so we talked about significant originations back in '22 and before and those are starting to move through the completion process.

Q: Hi, good morning. Just on the CIB build out, is there any sort of deposit opportunity there? I assume that there would be? And maybe if you could quantify what you'd expect that to be kind of over time? And I know it's going to depend on the different types of loans, verticals, things like that. But any way to think about that or size it? Thanks.

A: The answer Michael, is yes, and I'm going to ask Jake Munn if he would provide a little color on that and how they're thinking about that and approaching that. So Jake, you up to another question? So I'm up for it. I appreciate it, George, and good question at that. If we look across the CIB, there is obviously certain verticals that are going to be more deposit-rich than others, just given the inherent nature of what they do and the customers they provide. If we are looking at working capital intensive customers that we'd find underneath Mike Sheff's ABL team, for instance. We would anticipate smaller deposits there simply because they typically are on [suites] (ph) right? And so there's paydowns, their associated debt on a reoccurring basis. If we look across the board to Equipment Finance and Capital Solutions, which Jim Lyons runs at a little rock and does a fantastic job at. We do see a healthy amount of deposits there. And Jim and his team continued to push hard to generate additional opportunities, as it relates there. As it relates to our newest vertical, there are corporate banking and sponsor finance, that's where you're going to see a good amount of depository growth. These are bread-and-butter C&I clients located across. Our footprint and associated with our footprint, public companies, private companies, sponsor-backed companies, and it's a mix of both asset-based type lending as well as enterprise value lending. And so with this vertical, that's coming online, and you all are just getting a little bit of a taste of initially. We also anticipate great growth kind of in the similar footprints of ABLG and EFCS. That vertical typically has a little bit better yield to answer some of his prior question. And so we typically see spreads 50 to 100 basis points in excess of the other verticals that I mentioned, which is nice. But in addition to that, these are typically companies that are very low levered and they have a little bit more cash on their balance sheet. And OZK has a fantastic treasury management platform underneath Mr. Jessup. And as a result, we're starting to see a lift in deposits within the CIB. These verticals are not necessarily intended to ever be a 1-to-1 self-funded vertical by any means, but we're starting to see some steady lift there. And over time, for instance, within CBSF, I would foresee tracking closer to a 30% self-funded ratio with that business as they continue to come online and build out.

Q: Hi, good morning everyone. Just on the CIB build out, is there any sort of deposit opportunity there? I assume that there would be? And maybe if you could quantify what you'd expect that to be kind of over time? And I know it's going to depend on the different types of loans, verticals, things like that. But any way to think about that or size it? Thanks.

A: The answer Michael, is yes, and I'm going to ask Jake Munn if he would provide a little color on that and how they're thinking about that and approaching that. So Jake, you up to another question? So I'm up for it. I appreciate it, George, and good question at that. If we look across the CIB, there is obviously certain verticals that are going to be more deposit-rich than others, just given the inherent nature of what they do and the customers they provide. If we are looking at working capital intensive customers that we'd find underneath Mike Sheff's ABL team, for instance. We would anticipate smaller deposits there simply because they typically are on [suites] (ph) right? And so there's paydowns, their associated debt on a reoccurring basis. If we look across the board to Equipment Finance and Capital Solutions, which Jim Lyons runs at a little rock and does a fantastic job at. We do see a healthy amount of deposits there. And Jim and his team continued to push hard to generate additional opportunities, as it relates there. As it relates to our newest vertical, there are corporate banking and sponsor finance, that's where you're going to see a good amount of depository growth. These are bread-and-butter C&I clients located across. Our footprint and associated with our footprint, public companies, private companies, sponsor-backed companies, and it's a mix of both asset-based type lending as well as enterprise value lending. And so with this vertical, that's coming online, and you all are just getting a little bit of a taste of initially. We also anticipate great growth kind of in the similar footprints of ABLG and EFCS. That vertical typically has a little bit better yield to answer some of his prior question. And so we typically see spreads 50 to 100 basis points in excess of the other verticals that I mentioned, which is nice. But in addition to that, these are typically companies that are very low levered and they have a little bit more cash on their balance sheet. And OZK has a fantastic treasury management platform underneath Mr. Jessup. And as a result, we're starting to see a lift in deposits within the CIB. These verticals are not necessarily intended to ever be a 1-to-1 self-funded vertical by any means, but we're starting to see some steady lift there. And over time, for instance, within CBSF, I would foresee tracking closer to a 30% self-funded ratio with that business as they continue to come online and build out.

Q: Hi, good morning everyone. Just on the CIB build out, is there any sort of deposit opportunity there? I assume that there would be? And maybe if you could quantify what you'd expect that to be kind of over time? And I know it's going to depend on the different types of loans, verticals, things like that. But any way to think about that or size it? Thanks.

A: The answer Michael, is yes, and I'm going to ask Jake Munn if he would provide a little color on that and how they're thinking about that and approaching that. So Jake, you up to another question? So I'm up for it. I appreciate it, George, and good question at that. If we look across the CIB, there is obviously certain verticals that are going to be more deposit-rich than others, just given the inherent nature of what they do and the customers they provide. If we are looking at working capital intensive customers that we'd find underneath Mike Sheff's ABL team, for instance. We would anticipate smaller deposits there simply because they typically are on [suites] (ph) right? And so there's paydowns, their associated debt on a reoccurring basis. If we look across the board to Equipment Finance and Capital Solutions, which Jim Lyons runs at a little rock and does a fantastic job at. We do see a healthy amount of deposits there. And Jim and his team continued to push hard to generate additional opportunities, as it relates there. As it relates to our newest vertical, there are corporate banking and sponsor finance, that's where you're going to see a good amount of depository growth. These are bread-and-butter C&I clients located across. Our footprint and associated with our footprint, public companies, private companies, sponsor-backed companies, and it's a mix of both asset-based type lending as well as enterprise value lending. And so with this vertical, that's coming online, and you all are just getting a little bit of a taste of initially. We also anticipate great growth kind of in the similar footprints of ABLG and EFCS. That vertical typically has a little bit better yield to answer some of his prior question. And so we typically see spreads 50 to 100 basis points in excess of the other verticals that I mentioned, which is nice. But in addition to that, these are typically companies that are very low levered and they have a little bit more cash on their balance sheet. And OZK has a fantastic treasury management platform underneath Mr. Jessup. And as a result, we're starting to see a lift in deposits within the CIB. These verticals are not necessarily intended to ever be a 1-to-1 self-funded vertical by any means, but we're starting to see some steady lift there. And over time, for instance, within CBSF, I would foresee tracking closer to a 30% self-funded ratio with that business as they continue to come online and build out.