Bank of OZK, during its Third Quarter 2023 Earnings Conference Call, projected a robust origination growth in the fourth quarter, attributing it to a slowdown in projects and a pullback from some market competitors. The bank expressed confidence in its credit quality, noting no significant changes in the areas of its operation. It also highlighted plans to grow its deposit base and maintain its CET1 ratio above 10%.
Key takeaways from the call:
- Bank OZK (NASDAQ:OZK), led by President Brannon Hamblen, expects strong origination growth in Q4 2023, particularly in the Southeast region, including Texas and the Southwest.
- The bank anticipates good growth in funded balances over the next year, with specific guidance to be provided in the January call.
- Bank OZK is optimistic about its credit quality, attributing a successful quarter to quality sponsorship, low leverage, loan-to-value ratios, and state-of-the-art new assets.
- CEO George Gleason discussed the company's focus on growing its deposit base, particularly through CD deposits, and expects upward pressure on deposit costs as rates rise.
- The company reported a $10 million increase in net interest income compared to the previous quarter and expressed optimism if the Federal Reserve maintains current interest rates.
- Bank OZK has strong capital levels and expects to maintain a CET1 ratio above 10%, even if there are further declines in the ratio.
- The company expects moderate growth in expenses next year, emphasizing its focus on investing in growth rather than expense management.
In the call, Gleason also mentioned the company's preparation for a future wave of payoffs as the refi market reengages, stating that the company is actively building its infrastructure and diversifying its business to handle this and continue to grow its balance sheet. He also discussed the duration of loans in construction status, stating that it is difficult to predict how long they will remain in this status as it varies from loan to loan.
The company also discussed the potential increase in loan payoffs in the RESG portfolio next year, and the importance of loan floors in the RESG portfolio. They also mentioned that there were no stock buybacks in the third quarter but may consider it in the future if stock valuations are compelling.
In terms of noninterest expenses, the company expects them to increase each quarter going forward due to growth. The majority of the company's foreclosed real estate is under contract for sale and is expected to close before March 31, 2024. The company also mentioned that funding levels have steadily increased each quarter in 2023 and will continue to do so in 2024, driven by the record originations in 2022.
In the call, the bank also emphasized the importance of stress-testing loans and adjusting leverage accordingly. They noted that cap rates have not moved in tandem with the Fed's movements, and they expect cap rates to catch up if interest rates remain at the current levels for a few years. Most of their loans can tolerate a 500 basis point cap rate stress. The call concluded with the CEO expressing gratitude for the questions and looking forward to the next call in 90 days.
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