Q1 2025 Bank OZK Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to Bank of the K first quarter 2025 earnings conference call.
At this time all participants are in a listen only mode. [inaudible]
After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during this session, you will need a press star one on your telephone. You will then hear an automated message advising you your hand is raised.
To withdraw your question, please press star 1-1 again.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jay Staley, managing director of investor relations and corporate development. Please go ahead.
Speaker Change: Good morning. I'm Jay Staley, Managing Director of the Buster Relations and Corporate Development for Bank of ZK. 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.
Speaker Change: 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.
Speaker Change: Joining me on the call to take your questions are George Leecent, Chairman and CEO , Brandon Hamblen, President, Tim Hicks, Chief Financial Officer, Cindy Wolfe, Chief Operating Officer, and Jake Munn, President, Corporate and Institutional Banking [inaudible]
Speaker Change: We'll now open up the lines for your questions. Let me now ask our operator, Michelle, to remind our listeners how to keep you in for questions.
Speaker Change: Thank you, and as a reminder, if you would like to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question.
Michelle: Our first question is going to come from the line of Stephen's Galton with Piper Sandler. Your line is open, please go ahead.
Yeah, good morning, everyone. Thanks for the time.
Good morning.
Speaker Change: I know you guys said in the management comments, it's kind of hard to update guidance around RISG Originations, and I'd appreciate that given.
All the uncertainty, but-
Can you give us some? [inaudible]
Speaker Change: Maybe some anecdotal kind of discussion about what your customers are thinking, how they've been reacting over the past couple of weeks and what you think, you know, customer demand, how that's changed maybe in the near term and kind of how you're thinking about walking through that demand profile in the future.
Speaker Change: Brandon, do you want to take that one? Absolutely, Stephen, thanks for the question. You read the comments correctly. It's
Speaker Change: Equity was already having to work really hard to pencil deals, sponsors were having to work hard to find, you know, their common equity or their pref equity. So it was it was an environment that that already
Speaker Change: The beginning of Q1, there was, you know, and off the hundred-bathes point drop in the last four months of 24, there was some hopefulness about direction.
Speaker Change: and a lot of equity that had been on the sideline for a while. So as we look forward into the year, we were expecting that we could outperform 2024 by some margin as we said in Q1. Everyone's well aware of...
Speaker Change: Some of the uncertainty that's been introduced in the market over the last several weeks, so that's added another element, another consideration that our folks are having to look at. But I'll tell you as I've talked to folks
The sentiment has been yes, this is another more short-term.
Speaker Change: There's a level of confidence that it's going to make sense to do real estate deals. The uncertainty around that timing is caused us to put a pause on our guidance.
Speaker Change: as it relates to that, we come into this quarter with a fairly...
Speaker Change: Decent Closing Pipeline for the quarter, but as we look into the subsequent quarters, there's just enough uncertainty that we didn't feel like we could stand on solid grounds to give additional guidance there.
Speaker Change: I will tell you that sponsors are, you know, everyone's pushing in to...
Speaker Change: Look at the potential impact of tariffs and how their general contracts are written.
Speaker Change: Who's going to be up for funding additional costs if they occur? But I would also say that there's others that readily state that it's a mathematical problem. It's not necessarily a deal killer. So everybody's focused on [inaudible]
Speaker Change: The good deals that are out there and making sure they're underwriting those, structuring them correctly in line of the uncertainty. There will still be deals that are originated, but it's just difficult to say that, you know, what that volume is going to be over the remainder of the year. [inaudible] I'm sorry, I'm sorry, I'm sorry, I'm sorry
and Stephen, you were focused on RISG.
Trump.
Speaker Change: Volume. I would point out that we reiterated our prior guidance for mid-single-digit to high-single-digit total ungrowth for the year.
Speaker Change: And of course, our first quarter was pretty strong with 3.8% growth, not annualized in Q1, so while we did pull down the RESG
Speaker Change: We still thank our cautious guidance at the beginning of the year was was appropriate and still stands.
Speaker Change: Yeah, now that's a good point to make George appreciate that. And I think what's really interesting there and maybe my follow up would be it's like I think last four quarters 65% of the longer it has actually come from non-artist to you home which is
Speaker Change: Pretty impressive, and that handoff story continues to play out, you know, well ahead of what I would have thought, and it's great to see, but I guess my question there is, do you, with this kind of uncertainty and
Speaker Change: Maybe there's with tariffs, there's more of a focus on small business or, you know, CNI type of lending people are a little more to get issues. Make you guys think any differently about the pace. [inaudible]
Speaker Change: and the aggressiveness in which you would go after those loans and those new verticals versus, you know, R-E-S-G, which has traditionally been just your bread and butter kind of your strongest highest credit quality, most collateral type loans. I guess this is the environment that you think about the timing of that handoff any differently. [inaudible]
Speaker Change: Yeah, that's a great question. The Corporate and Institutional Banking Group, but Jake Munn runs for us, has obviously been the biggest contributor to that non-RESG growth, which as you pointed out, has been the majority of our growth over the year.
Speaker Change: Recent Quarters, Most Recent Quarters. So I'll let Jay, Jay can answer that question, Jay.
Jake Munn: Yeah, I appreciate that George, good morning Stephen. Good question there. You know, we had a good strong quarter for Seattle in first quarter, ABLG led from a total dollars to points, the end point, CBSF led from a new relationship count standpoint. Thank you.
Jake Munn: You know, first quarter for diversified sea and islanding holistically, if you look on the markets typically the weakest, second quarter and fourth quarter, mimic one another, third quarter is typically the strongest.
Jake Munn: So we do still feel good about the build and the momentum that we're getting in CID as a whole.
Jake Munn: It's a part of that continued growth growth and diversification strategy that we talked about previously.
Jake Munn: Given that macroeconomic noise and some of those headwinds you mentioned, you know, we're still conservatively looking at this on a quarter by quarter basis, but I can tell you, our three legacy business lines being ABLG, EFCS and fund finance still have great pipelines. [inaudible]
Jake Munn: They continue to add new deals at a study cadence. When we look at our corporate banking and sponsor finance business line that we only launched a few quarters ago, that group is real still in expansion mode and we're actively looking at placing two additional teams.
Jake Munn: Out within our core footprint into major metropolitan areas that would further drive growth.
Jake Munn: And in addition to that, our LSCS group, which I'm sure we'll talk about later on in the call. Is that been running? So we're starting to feel the benefit of additional fee income and business services that we can provide for our clients.
Jake Munn: And then, line up slowly, I'm equally as excited to share on this call that we're actively pursuing and launching a natural resources group this year. We've identified and sourced and brought over our new Executive Managing Director of that group. George McKinney has been a long time colleague and friend and have great faith in it.
Jake Munn: and so we'll be over the next couple quarters working with our credit risk partners, corporate finance, analytics, et cetera, to build that group up and ready it for launch. And so, as I mentioned, our pipelines may remain robust, we're cautiously optimistic of the continued growth that you're seeing in CID and that handoff we've discussed.
Jake Munn: All of our business lines for the relaying focus on criticality first, and I've got all the faith in that team to continue to mark their direction. Thank you very much.
Jake Munn: Stephen, I would add implicitly in the reiteration, re-appermation of our aggregate long-growth
Jake Munn: We have withdrawn RESG origination volume guidance. Implicit in that is the growing confidence and expectation we have for other business lines to
Jake Munn: Pickup, the pace, if and as needed to offset any reduction in R.H.T. origination volume, so we're feeling good about it.
Speaker Change: That's fantastic. Thanks for all the time on the tiller. Appreciate it. It's always a great, great start to the year.
Jake Munn: Thank you in one moment as we move on to our next question.
Speaker Change: Our next question comes from the line of Manan Gosalia with Morgan Stanley . Your line is open. Please go ahead.
Hi, good morning all.
Good morning, Manan.
Speaker Change: You noted it's an uncertain time and I guess my question is if this uncertainty remains and businesses are slow to make decisions
Speaker Change: How are you thinking about the base at which properties lease up and find permanent financing? And what conversations are you having with sponsors in terms of their ability to support properties for a longer period of time should we need that?
Brandon, you wanna take that one? [inaudible]
Brandon Hamblin: Absolutely. I'll speak about the last part of that question, Manan, conversations with sponsors.
Speaker Change: you guys have seen in our comments for a number of quarters.
Speaker Change: the evidence that we continue to update for you around how our sponsors are doing exactly that. We are up to 957 million of total additional equity contributions.
Speaker Change: over the 450 modifications and extensions that we have made. So, yes, we are constantly having those conversations.
Speaker Change: and we're very pleased with the level at which they continue to support those as it relates to, you know, leasing activity, business decisions.
We are seeing content usually set across the portfolio.
Speaker Change: that occurs or as it's elongated continue to expect to continue to see our sponsor support these projects that as we noted are you know the newest and highest quality projects in the market and we our experience has been that those highest quality best located projects. Thanks.
Speaker Change: do still obtain the majority of the leasing that does occur in the market. So the story is similar today as it was before. We, as you noted, have some additional noise in the market. It remains to be seen how long that lasts.
Speaker Change: But our sponsors have been great to step up through the higher for longer period that we've been through over the last couple of years and we expect they'll continue to do so into the future.
Got it very helpful.
and maybe just a pivot over to NII.
Can you talk about, what drove that? That's...
Speaker Change: I see the new disclosure on securities repayments in 2025. Can you talk about what reinvestment rates are getting there, and maybe also speak to the duration that you're putting on the securities book, you know, we noticed it's been increasing a little bit over the past couple of quarters.
Speaker Change: Now, let me take the securities question and then I'll let Tim provide some commentary on the net interest income question, but
Speaker Change: This was the first quarter among many that we actually had some growth in the bond book and with the very optimistic view of the economy
Speaker Change: Backed up into our strike zone, so we bought about $320 million.
Speaker Change: Strategies. We were very particular, very careful in what we bought in there. We weren't in that range for very long, but we did add some bonds and those had a very nice shield on them. We're obviously...
Speaker Change: went way far away from that when the tenure got down to like 380 and it's now back I think to 430 or something today so you know.
We're...
Speaker Change: We would probably not be a buyer in that poor 68, 478 range now, but beyond that would be a buyer again. So I think we were we were very opportunistic in what we did and I feel good about that. We've got, you know, obviously some
Thank you very much.
Speaker Change: 13% of the portfolio I guess rolling off this year and another 15 or so rolling off next year, 16% rolling off next year in the low threes.
Speaker Change: weighted average yield for those. So we would expect to reinvest those at improved rates, you know, in the fives to seven sort of tax equivalent yield range if we are consistent with our prior experience. So.
Speaker Change: That's what I've got to say on investment security. Tim, you want to comment on the net interest in John General, including the fact that we had two pure days in Q1 and we did in Q4 or so.
A good result there. We gave you some guidance on-
Speaker Change: on page 8 under that figure 7 on our net interest margin and where we believe that should go under different rate scenarios. Thank you very much.
Speaker Change: But certainly during the, during Q1, we had a great, as George mentioned earlier in the call, we had a very strong loan growth quarter and, you know, we believe we'll have continued growth in average earning assets throughout the year, which
Speaker Change: We continue to expect that would drive a record net interest income and at least one or more quarters in the rest of 2025 and certainly for the full year.
Speaker Change: Cindy and Adi in team to the great job driving down our CYVD, Faring the Quarter, we were down 29 basis points.
Speaker Change: in the quarter. I think that's probably going to be one of the best in the industry for this quarter. This quarter is...
Speaker Change: as more folks report, and you see our chart on figure six, we still have...
Speaker Change: Several more quarters of volume of time deposit maturities with weighted average rates in the mid-4% range, so we still feel like we've got some...
Speaker Change: opportunity to continue to decrease our CUIVD. So, you know, we were very pleased with our NII results for the quarter and I think that sets us up and a pretty good spot for the rest of the year.
Speaker Change: Cindy, do you want to put color on kind of where we finish the quarter and on deposit call since that's a big gal in the obvious way of net interest income.
Cindy Wolf: Sure, I'm happy to do that. A little color on March, obviously we're extremely pleased and proud, as Tim said, of the 29th decrease in the quarter.
Cindy Wolf: but if you want to have a little more about March and why we're... [inaudible]
Cindy Wolf: As Tim says, we expect to have more opportunity there with our maturities in the future. In March alone, we picked up 90 basis points for savings. So we retained 88% of our maturing CDs.
Cindy Wolf: in March. And we cut another 10 basis points in April on our published CD specials. So...
Cindy Wolf: Even while doing that, we've grown deposits, and it's if you read anything about deposit growth and
Cindy Wolf: Deposit Acquisition right now. It's extraordinarily hard to grow deposits right now.
Cindy Wolf: and also just aggressively out there growing our business with our amazing team of retail bankers and the amazing team in our wholesale deposit group.
Cindy Wolf: and then the 90 basis points that we picked up in March for clarification. That was the weighted average rate on time deposits rolling versus the weighted average rate on that. That's right. Yes, sir. Yeah.
Thank you.
Cindy Wolf: It was 371. So, seven basis points below the quarterly average. So, we're we're continuing to
Cindy Wolf: So, I think you mentioned last time that maybe one or two cuts...
Cindy Wolf: would be slightly negative to them because your loan yields would come down fast. And then beyond that, the floor is protecting you on the loan side, is that still something that you guys see happening, more than two cuts, and your name could be supported a little bit more.
Cindy Wolf: Yes, and we alluded that in the languages, Tim pointed out below figure seven there on page 8 where we said if the bed reduces interest rates. [inaudible]
Cindy Wolf: Displate loan yields with decreased faster than our deposit costs likely resulting in some decrease in our net interest margin at least until time deposits reprise and our floor rates are reached.
Cindy Wolf: on More Verbal Right Lines, and we refer you to Figure 22. .
Cindy Wolf: and other similar market rights. So you can see when we get down to...
Cindy Wolf: 28% of the loans, 22% currently to 28% of loans at their floors with a 25-biff increase.
Cindy Wolf: With a 50-bip increase, that number goes to, or decrease, thank you, decrease, that number goes to 44%. So we get a lot more sport from the floors and, you know, the 44% number is a meaningful percent at their floors that
Cindy Wolf: and you know, we'll contribute to us protecting the margin quite a bit. So that's a big difference between a minus 25 and a minus 50 in there.
Great, thank you
Cindy Wolf: Thank you and one moment as we move on to our next question.
Tim Mitchell: Our next question comes from a line of Tim Mitchell with Raymond James. Your line of open, please go ahead.
Hey, good morning, everyone. Nice to take my questions.
Tim Mitchell: One start, start on the buybacks subsequent to quarter end, which was great to see. With stock still trading around those levels, if there's any color you can give on your attitude, just kind of giving all this uncertainty out there, but you still have a lot remaining under your program, just curious to give us any thoughts.
Tim Mitchell: Tim, you want to take that? Yeah, I mean, as you said, if we continue to trade at current levels, we would expect to...
Tim Mitchell: continue to repurchase throughout the quarter, our current authorization end at the end of the quarter. We would expect our...
Tim Mitchell: Board to consider new authorization sometime before the end of the quarter.
Tim Mitchell: 16th, we had some additional purchases as well. So it depends on stock price and a lot of other variables, but I think you could expect us to be somewhat active at this level.
Got it. And then on Expanses.
Speaker Change: You know, if one growth is more muted than you expected, I know it sounds you sound pretty confident in your outlook, but just your thoughts on, you know, weighing, you know, eat near-turvy PS versus, you know, continuing to invest in branches and new people just how you're thinking about that over the near term. Thank you very much.
Speaker Change: Well, we are very focused on taking advantage capitalizing on opportunities in the market. You saw that with our bond purchases early in the quarter.
You solve that with our...
Cindy and her deposit teams being very...
Speaker Change: strategic in the way they managed our composite base to get probably one of the best quarter-or-quarter reductions in our cost of interest bearing deposits. So we're leaning into opportunities. Thank you very much.
Speaker Change: that the market provides. And that's always been part of our culture and our company's history as to that.
Speaker Change: Capitalize on Opportunities when they're presented. We have believed last year, continue to believe this year, that we've got opportunities to both grow various parts of our balance sheet. [inaudible]
Brandon Hamblin: Brandon and Jake have addressed that, if Alan Jessup or Ken Ronnaker were here or are Dennis poor who run other parts of our business, they would have addressed.
Brandon Hamblin: The work they're doing to capitalize on growth opportunities on the assets side. We also think we've got real good opportunities to capitalize on growth on the deposits side. That's so.
Brandon Hamblin: We will continue to add team members to growing areas, Jake alluded to one recent hire in a new line of business in the energy area. We're continuing to add staff and mortgage, continuing to add staff and
Brandon Hamblin: Business biking continue to ramp up our consumer biking pieces. So we're growing and we're adding people to grow and that's reflected in the 10% growth in our net. .
non-interest expanse.
Brandon Hamblin: Estimated 10% growth and non-interest expense this year, so we're continuing to capitalize on that and that includes opening a lot of retail branches and sending you, I don't know if you know you. Thank you.
Brandon Hamblin: This year alone, if you look at the schedule, the published schedule that we share to plan all those branch openings, it's 34 branches. Now that...
Brandon Hamblin: Or Days, as far as the exact timing of those openings based on construction schedules and all sorts of things that we can't control. But that's an estimate that we'll have at probably around 30 more branches at the end of the year than we had at the beginning of the year.
Brandon Hamblin: and those will take time to grow our deposits, so we're making those moves now.
And, you know, hiring staff, obviously.
Some of those are outright. [inaudible]
Brandon Hamblin: Acquisitions of Branch Buildings, and we can get those open to really quickly.
Brandon Hamblin: and the ones that have ground up development can take months or even years to develop, but over time we expect that to add meaningful deposit growth.
Brandon Hamblin: And that is, I would tell you, that is embedded in our 10% year-over-year guidance.
Brandon Hamblin: as we have the projections for adding an energy group, growing CIB, growing the business banking, growing our consumer banking functionality. So that's our end mortgage, that's all built into our projections.
Speaker Change: Thanks for all the call. Thanks for taking my questions.
Thank you. Thank you one moment for our next question.
Speaker Change: Our next question is going to come from the line of Jordan Gantt with Stephen Sink. Your line is open, please go ahead.
Speaker Change: You're the refugee mix going forward. I think last time you said it would be kind of upper 50% by year end of 25 and in the early 26 is that still kind of target we can be expecting.
Speaker Change: I think you'll see a continuation of the trend that we've seen over, you know, the last business.
R.E.S.G.s percentage of our total book comes down.
Yeah, bees and our community biking, martial biking.
Speaker Change: Part of our book, along with Indirek Lending goes up. So I think that trend is there, you know, whether we're at 50% RESG or 55 at the end of the year, PC7.
Speaker Change: The trend is dire. It's a long-term trend, and I'm not going to…
Speaker Change: Reaffirm specific guidance because I don't have that number in front of me and haven't re-projected that but the trend is there. RST is going to...
Speaker Change: It will become a lower percentage of our book. Now, longer term, it's still going to grow. It'll be bigger in five years than it was two years ago in my estimation, my expectation, but it will be a lower percentage.
Speaker Change: of our book. So we expect as we've been very clear on this, we're not in any way pulling back from that business, we're fully committed to its business, but these other business units.
Speaker Change: are going to continue to outgrow yet in most quarters going forward for the next several years until RST is a much smaller percentage of our book, even if it's bigger and dollars.
Perfect.
and then maybe just another question. Stephen
Speaker Change: I noticed that there was the Maryland land loan that was moved to a substandard not a cruel but I did notice that the LPV on it was
Speaker Change: You know, pretty healthy, pretty low, 51% especially compared to the other substandard.
and Brandon, you want to take that question? Thank you.
Sir George, I'm-
Speaker Change: George, thanks for the question. We've based that on the appraisal that we have. It was a 2024 appraisal. That's where evaluation was at that point in time. That is a healthy LTV. We'll be updating that appraisal in the near future. Thank you.
Speaker Change: But it's just a complicated land development loan that has some similarity, I guess you would say, in that context.
to the Chicago land loan, a large complex. [inaudible]
Speaker Change: So we've taken what we believe is the right approach with that asset in where we rated it in the reserve that we took on it. So that's really the story on that asset.
Yeah, I'm going to add a little bit to that.
Most of our land loans in our R.H.T. portfolio are...
going toward near-time-first development.
There are a few lines in the book.
Speaker Change: that are more land development loans, the Chicago land loan that we have in other real estate pull closed assets as one of those. And this loan is one of those few that really is a land development loan, Maryland loan. [inaudible]
That's really where the similarity on this probably ends.
Speaker Change: We're in active, positive discussions with the sponsor on this. This loan is migrated on here because of the nature of those discussions and the fact that it's approaching a maturity. It's a maturity.
It's a-
premature
Speaker Change: to assume that it is going to pan out the same way the Chicago land did. It may it may not it may continue to progress in a very positive manner going forward. We don't know. But it's going to be a very positive and positive manner going forward.
Speaker Change: But the uncertainty around that is we approach maturity and discussions with customers the reason it's on there. So I think it's an appropriate place to put it.
Speaker Change: We'll have more clarification on that next order as we continue discussions with the sponsor about their plan forward, and as we get a new appraisal on it in connection with this upcoming maternity. Thank you very much.
Perfect. Thanks for all that updated discussions.
and then maybe just kind of won't follow up on.
regarding that Chicago landlone. [inaudible]
Speaker Change: Can you give any update on what's the appetite to market this property? I kind of sounds like you can be a little bit more patient and...
Speaker Change: Just kind of wanting to understand how aggressively you might have marked it going forward.
Speaker Change: It is a very significant asset if you're reading the commentary, particularly in Chicago about it. You understand the
Speaker Change: significant potential and importance of this asset to the future of Chicago and development in Chicago with this significant asset. So we'll be as patient as we need to be.
Speaker Change: to get the right sponsor in there who has the the capital and the expertise to develop this land to its full potential or significant potential.
Speaker Change: and we'll take the time to do that. With that said, we've already had several.
Speaker Change: Parties indicate an interest in it, very serious interest, it would seem, time will tell on that, but this is a...
Speaker Change: City of Chicago is very interested in the outcome of this development because it's important to the city, and it's gotten quite a bit of attention.
Speaker Change: Already as folks have come to know that we've taken title to it and are looking for the right path forward. So we'll be as patient as we need to be, but
Speaker Change: It wouldn't surprise me if things moved on this fairly quickly just because of the value and importance of the land now.
Speaker Change: You shouldn't take that to me. We're going to have it sold in a quarter, a big complicated land piece like this with a lot of interaction with the city and city entitlements and tip districts and those things. It takes a good while to formulate a plan and and. Now.
Speaker Change: Developed full due diligence to formulate a big plan to go forward with a project like this. So it'll take a little while but we're optimistic from the initial unsolicited feedback we've had from the market.
Perfect. Thanks for answering my questions.
Speaker Change: Thank you, and moment as we move on to our next question. Our next question is going to come from the line of Samuel Varga with UBS. Your line is open. Please go ahead.
Samuel Varga: Good morning, Sam. I wanted to turn back a little bit to just the discussion around how the macro environment is impacting the originations. Could you touch on the other side of that equation, the payoffs? Does the recent volatility speed up repayments at all?
Speaker Change: Yeah, happy day, Brandon. We got that, George. Yeah, yeah, so great, great question, Samuel.
Samuel Varga: In this past quarter, you saw a little bit of drop off in the originations. I'm sorry, in the repayment volume that we had relative to past quarters, but I wouldn't take that as indicative of repayment certainly in the near term. I mean, we've noted that
Samuel Varga: as some of the noise, the macroeconomic noise and uncertainty unfolds. It does have an impact on these decisions, but our guys stay very close to our sponsorship in terms of their plans and their expectations.
Samuel Varga: for the very near term. We do expect those repayments to return to a level that was more akin to what we saw in the latter part of 24.
and we would expect that to, as we said, [inaudible]
at Resultant Elevated Repayments for the Year. Um.
Samuel Varga: What information we have today, we do expect those repayments to be elevated over Q2 and to continue to do so over the remainder of the year.
Speaker Change: Brandon, we might give a little interim color, I believe already in the first 10 days or so, two weeks of
Brandon Hamblin: April , we've had six RESG loans pay off. I believe the balances were, what, 250 to 300 million range total? Correct, that is correct.
Brandon Hamblin: Yeah. And those loans, most of them, if not all of them, were loans we expected to pay out in Q1 but...
Brandon Hamblin: for one reason or another, the closings almost drug out another week or two, that's certainly not unusual. Big, big transactions.
Brandon Hamblin: Whether we're closing them or somebody else, I have a lot of moving parts to them and-
Brandon Hamblin: A lot of lawyers and others involved in that closing process and those closing sometimes take.
Brandon Hamblin: You know, get hung up on one issue or another and take several weeks longer than expected or sometimes even months longer than expected. So that's not unusual, but it did throw our expectations off a little bit from Q1 to Q2. Thank you very much.
Brandon Hamblin: Yeah, to your point, five of those six paid off in the first three days of the month, so...
Point Will Made.
Now they just merely missed the time. [inaudible]
Awesome. Thanks for all the color. And then just to...
Speaker Change: More Housekeeping item, and it's probably for Tim, on the buybacks, and the caper ratios have been CET1, especially, has been pretty flatish, it seems, or I look at the preliminary for the first quarter. Is it fair to say that the buybacks are? [inaudible]
Speaker Change: There, and you know, you're going to be opportunity to stick and sort of keep capital ratios flatish through that. Is that a governor on it or? Yes, sir.
Yes, thanks for the question.
Speaker Change: Certainly we had really good growth and then really strong earnings during Q1, which as you pointed out, kept there.
Speaker Change: But yes, I miss Sherry Purchases right now with such a compelling value.
Speaker Change: We would be willing to let the CET-1 come down slightly.
Speaker Change: it's likely that they'd bounce back up in subsequent quarters as we...
Speaker Change: to go throughout the year. So, you know, we're really pleased that we've held on to our share to re-purchase authorization up to this point. You know, we've been very patient and as George is pointed out.
Speaker Change: We've got a history of being very opportunistic on a lot of different fronts and this is one of those cases where
Speaker Change: where our patients has paid off and we're really able to utilize that chair repurchase authorization at very compelling values right now.
Great. Thank you very much for taking your questions.
Speaker Change: Thank you and as a reminder to ask a question, please press star 1-1 on your telephone at this time. One moment for our next question.
Speaker Change: Hi, next question comes from a line of Timur Braziler with Wells Fargo. Your line is open, please go ahead.
Speaker Change: Hi, good morning. I wanted to circle back. I wanted to circle back on the Chicago exposure and the relationship with Sterling Bay in particular.
Speaker Change: clearly took back a good chunk of the land and linking yards. [inaudible]
Speaker Change: You do have other exposure to Sterling Bay, I'm just wondering. [inaudible]
Speaker Change: and the quarter progressed, how are you thinking about the other loans that you have to struggling by, and if there was maybe a broader consideration whether it was for incremental allowance, risk rating, what it might be for that sponsor in particular.
Brandon, you want to type that? [inaudible]
Speaker Change: Sure Timur, I would tell you that those loans are unique to there is a commonality in the sponsorship but you have to understand.
Speaker Change: You got significant leasing in the number of those projects. You have different capital stacks in those projects. You have different capital partners. [inaudible]
Speaker Change: Part of those projects that are a consideration. So, it's not our practice to broad brush a situation like that. In a portfolio that just happens to have the same sponsorship name. [inaudible]
Speaker Change: Okay. And I guess more specifically, the remaining loans in Lincoln Yards themselves.
Speaker Change: How are you guys thinking about the development and the fact that it has been a little bit of a mess with just the city and then the fact that the city is so involved is there an incremental risk that either the full build out or the leasing off of the additional properties only can yours themselves gets pushed out and just how that might translate to the loans.
Brandon, go in. Yeah, yeah, so again, again.
lumped in a lot of issues there. Thank you very much.
Speaker Change: that are not necessarily tied together, but we treat each one of them individually as to their situation. As George noted,
Speaker Change: That's a phenomenal location and piece of real estate. It has a tremendous amount of opportunity, a tremendous amount of interest. It needs...
Speaker Change: as George alluded to, the right sponsorship to execute on that.
Speaker Change: But I would also remind you that our, you know, our bases in these loans.
Speaker Change: is we enter these to be prepared for things not going as planned.
and we're pleased with the fact that we've got diversity.
Speaker Change: property type, and again to lump all those in would be a mistake.
Speaker Change: I would make a couple months. Timur, let me add another comment or two. We've had a number of successful executions with the Starling Body Group and a positive long-term history with them.
Speaker Change: City's interest and engagement in this project, we view it's very positive
is going to be a developer that is going to...
worked closely with the city.
Speaker Change: because there's city infrastructure and collaboration that is required on a project of this scale that sets right.
Sort of at the
at the Compliance of Serval. [inaudible]
Speaker Change: significant urban areas in the city, so urban suburban areas in the city. So it's going to take a sponsor who is very capable of walking with the city and the city is going to have to be engaged. So we view that constructively, not negatively. And if there was a negative. So let's take a look at that.
Speaker Change: In your end, though, in the question there about city involvement, we actually view that as positive, not negative.
Speaker Change: Okay, thanks for that. And then I follow up just the gross growth and diversification strategy.
Speaker Change: I'm just wondering, you know, your thoughts on that strategy going into a period of uncertainty?
Speaker Change: Like we're in today more specifically just in growing out C.I.B. as aggressively as...
Speaker Change: You guys have been growing it. I'm just wondering, you know, a does that growth rate still make sense as we look at it today just given the level of uncertainty and then I guess if it does just be what the conviction that you guys have and making some of those loans to industry that maybe could be more at acute risk if the economy does sour more quickly. Thank you very much.
Speaker Change: is as strong as it's been any time since we started down that path five or six years ago when we...
Speaker Change: brought in and began to build the first team that is now part of Jake's group and then a year later added another team on a different business line and a third year added another team on a different product line.
Speaker Change: We absolutely believe it's the right thing to do. We've got tremendous confidence and...
last year plus.
Speaker Change: and these were experienced veteran folks. They share our commitment as Jake articulated in his earlier comments that asset quality is always paramount. They are doing business with high quality customers. [inaudible]
Speaker Change: and I think they'll do a good job. I think we will achieve more diversification and that will [inaudible]
Speaker Change: company, healthy for our stock price and will not dilute our asset quality but contribute to a better asset quality through braver diversification.
Speaker Change: Yeah, and then the piggyback off of that George, if I can. It's a good question, a fair question. You know, it's previously mentioned, we're really just now hitting our stride with some of these new business units that have come online.
Speaker Change: and you know when we look out over the broader opportunity that's out there.
Speaker Change: specifically in that just general CNI space, college, middle market, upper middle market, corporate space, you know the bank doesn't have much asset there historically and so pushing into that there's really a whole world available for us to continue to grow within.
Speaker Change: I want to reiterate there, just given that market uncertainty and some of those macroeconomic headlines that you mentioned, and if you look at the opportunities we're pursuing, vast majority of them have a sponsor behind them are publicly traded, so we've got a nice tertiary source repayment potential there or access the capital markets, if you will.
Speaker Change: Average clients, or if not most of our clients are over 10 million plus in Evada, they've been around for years and years so they've gone through multiple.
Business Cycles and Economic Cycles and so they've gotten hardened.
Balance Sheets
Speaker Change: We've taken a page out of our ESG book. If you look at our average LTEB, it's down in the 50 percentile range on these two when we're going to enterprise value lending. And then also to reiterate, we don't do leverage lending and we're actively doing enterprise value lending, which is very different than many of our peers. And so, holistically, if you look at the type of opportunities we're pursuing in CIB. [inaudible]
Speaker Change: Strong Balance Sheets, Ample Equity Inn, and a long-running history of success for these companies through multiple business and economic cycles. So to George's point, what fascists have optimistic and anticipate continued growth across these CID business lines.
and the new CIV business lines that we've launched at. [inaudible]
Speaker Change: We're kind of in tandem with the existing ones, ABLG, EFCS, and Fun Finance, and so if we start to see pricing pressure or stretching pressure in one of those areas, it allows us to pull the lever on another area to continue to pursue that growth and so that diversified nature that we built out.
Speaker Change: Strategy, for these roles, what's going to continue to propel our growth there? That's successful.
Thank you. Thank you for the questions.
I think you in one moment as we move on to our next question.
Speaker Change: Our last question is going to come from the line of Brian Martin with Janney. Your line is open. Please go ahead.
Take good morning guys.
Good Morning, Brian .
Speaker Change: with the terrorists and kind of the uncertainty and just, you know, the opportunities, you know, I guess when you look at the reserves today, I guess, are you, you know, with the Moody sport cast, I don't know how you guys changed your, if it all changed your outlook in terms of reserving or just how we should think about that. [inaudible]
Speaker Change: Going forward or if you could just give a little bit of color if you haven't already done so it's just done you know how we should think about that going forward.
A ray of challenges that our customers have faced.
Speaker Change: that have prompted that ACL bill. And, you know, the recession was always coming. The recession was coming and the recession was coming.
from the lingering effects of the pandemic from...
Speaker Change: remote work from all sorts of things, and then it was the bad-raising rates, you know, $500, $500.
Speaker Change: 25 basis points, I guess 525 basis points of fed rate increases.
Speaker Change: The recession risk in Europe and trade tensions and supply chain disruptions. And now we've got the little tariff tantrum.
Speaker Change: You know, increased and handoff from one apparent risk to the next apparent risk of occurred. We just kept building our ACL.
Uh, um, uh...
Speaker Change: You know, realizing that the cumulative impact of all these risks could manifest itself in more and more challenges for our customers. Our customers have done an exceptionally good job.
Speaker Change: And if you look over that 11 quarter period of time, our provision expense has been four times our actual losses.
Go ahead.
Speaker Change: Bill of the ACL and two our customers have just continued to perform very well.
Speaker Change: We looked at all that coming into the year through the fourth quarter when everybody was reaching for it to the extreme and said, wow, that is, that's...
Speaker Change: Probably excessive euphoria and built our ACL in the fourth quarter of last year even though everybody was any euphoric mindset because we were adopting a very conservative
Speaker Change: set of scenarios at that point in time and being appropriate, prudent and cautious regarding the outlook is that euphoria has turned more recently into just doom and gloom.
You know, we think the doom and gloom is...
is overdone .
Speaker Change: as the euphoria was three months earlier and that the economy and the outcomes are going to be somewhere in that, but being cautious and being prudent and wanting to make sure we've gotten appropriate ACL in the quarter just ended we built our ACL again.
Thank you for your time.
Yes, thanks, George.
Speaker Change: As you pointed out, I mean, we have increased more than doubled over that 11 quarter period. Our ACL increased to 113%, which was a net $339 million increase.
George: given all the, as you pointed out, all the risks and uncertainties that have been present over those 11 quarters, you know, we have been consistently weighted to downside scenarios.
George: and during the quarter just ended, we did shift even more of our weightings to those downside scenarios. You can see in that last paragraph, we mentioned that the weightings we assigned each of the Moody's S4, which is a...
is a recessionary scenario and Moody's Declaration scenario.
George: Each of those exceeded the weighting that we had to the Moody's Baselon scenario, so...
George: You know, we've been including stagflation in our in our downside scenarios for the last several holders and continue to view that as something that should be considered in our ACL calculations.
Speaker Change: Gotcha. Okay, that helps in maybe just one, not the Chicago and George, but the other property in Oreo that was, you know, they had the contract out there. Did you provide any update on where that stands today, or do you have an update on that?
George: Yeah, we've got that updated. The Los Angeles Land is updated on page 25 and you know in our
Thank you. Bye.
Speaker Change: perspective, purchaser of that land didn't make the contract extension payments that-
Speaker Change: We reasonably quickly, I think it took about a month for the sponsor to come back and work out a new contract. We had already...
Speaker Change: Council of the O-Contract, and captured the $3 million of non-refundable earnest money that we applied that reduced our carry value on that asset from $59.95 million to $56.95 million, where it is today.
but is part of the sponsor...
Speaker Change: in our non-interest income and the quarter just ended and put up...
Speaker Change: and additional $1.5 million in non-refundable earnest money deposits. So for me, and they put up, that was an addition to the...
Speaker Change: Six Me and that they had previously paid to us and all the money that they had spent on it. The contract currently expires June 30th. They have one extension option which they negotiated for three additional months.
Speaker Change: to September 30 to exercise that extension option. They've got to pay us a million dollar fee and put up another million dollars of non-refundable earnings money by June 30.
Speaker Change: It's impossible to know for sure if this project closes or not, but certainly they, you know, by the time they do that they will put up if they exercise the extension that will pay dust.
Speaker Change: $12 million in fees and earnest money toward the project, but seems pretty...
Serious
Speaker Change: interest to me, and they will have spent millions of dollars of other money on due diligence and work on the project. So, I think there's
It's more likely that that
Speaker Change: Sale Closes than Not, but I'm not going to celebrate it till it closes, and the money is in our account. If it closes that contract, the closing should result in a small gain on sale. [inaudible]
That's it. Okay, I appreciate you taking the question. Thank you.
Speaker Change: All right. Thank you. Thank you. This concludes today's question and answer session. I would like to turn the conference back over to George Gleason, Chairman and CEO for closing remarks.
Speaker Change: Thank you, guys, for joining us today. We appreciate all questions. We appreciate your interest in OZK, and we look forward to that.
Speaker Change: Talking with you in about 90 days, more like us. Thanks so much.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.