Bank Ozk (OZK) 2002 Q4 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Bank of the Ozarks quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one of your telephone keypad. If you would like to withdraw your question, press the pound key.

I would now like to turn the call over to the Director of Marketing for the Bank of the Ozarks, Mr. Randy Oates. Sir, you may begin your conference.

Good morning. I'm Randy Oates, Director of Marketing for Bank of the Ozarks. The purpose of this call is to discuss the company's fourth quarter earnings press release, issued after the close of business yesterday. Our goal is to make this call as useful as possible in understanding the future plans, prospects, and expectations of Bank of the Ozarks.

To that end, we'll make certain forward-looking statements about our plans and expectations of future events including statements about economic and competitive conditions, our goals and expectations for net income, earnings per share, net interest margin, and the potential effects of a flattening yield curve and a high level of mortgage refinancing, net interest income, non-interest income, including service charge income and mortgage lending income, non-interest expenses, our efficiency ratio, asset quality, interest rates sensitivity, future growth and expansion, and loan and deposit growth.

You should understand that our actual results may differ materially from those projected in any forward-looking statements due to a number of risks and uncertainties, some of which we will point out during the course of this call. For a list of certain risks associated with our business, you should also refer to the forward-looking information caption of the management's discussion and analysis of our public reports filed with the SEC. Forward-looking statements made by the company and its management are based on estimates, projections, beliefs, and assumptions of management at the time of such statements and are not guarantees of future performance. The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

On June 17, we completed a two for one stock split in the form of a stock dividend affected by issuing one share of common stock for each share of stock outstanding on June 3. While share per share information, we will discuss today has been adjusted to give effect to that stock split.

Now let me turn the call over to George Gleason, our Chairman and Chief Executive Officer.

Thank you for joining today's conference call. We are very pleased to be reporting excellent results for both the fourth quarter and the full year of 2002.

During 2002 we reported record net interest income and record non-interest income each quarter. This strong revenue performance, combined with a sub-fifty percent efficiency ratio in each quarter and loan offers totaling just 22 basis points, produced strong bottom-line performance for the bank this last year.

Each quarter produced a new record in net income, giving us eight consecutive quarters of record net income. That's 22 quarters of record net income out of the last 24. As I mentioned in the press release, over the last seven years our compounded annual growth rates have been 25.4 percent per asset, 24.7 percent for loans, and 23.3 percent for deposits. This strong balance sheet growth has allowed us to exceed one billion dollars in total assets at year-end. And most importantly, over that seven-year period we have delivered solid performance for shareholders, achieving a compounded annual growth rate for net income of 31.1 percent.

According to Bloomberg, if you purchased our stock on July 25, 1997, a week after our initial public offering, and held it until January 3 last week, you would have a cumulative total return, assuming reinvestment of dividends of 199 percent, resulting in a compounded annual return for that five and a half year period, of 22.3 percent. As a substantial shareholder myself, I'm very pleased with those results, and I hope that you are as well.

Now that's enough celebrating the past, let's talk about the future.

First, let's consider asset quality. At year-end our ratio of non-performing loans to total loans was 31 basis points. That's down eight basis points from September 30, but up two basis points from year-end 2001. Our non-performing assets at year-end were 24 basis points of total assets, which is down 10 basis points from September 30, 2002, and down four basis points from year-end 2001.

Our ratio of loans past due 30 days or more, including past due non-accrual loans as a percentage of total loans, was 75 basis points at year-end. That's down eight basis points from the September 30 number, but up three basis points from year-end 2001.

These three ratios have been very favorable throughout 2002, the moderate quarter-to-quarter movement in these ratios in 2002, in my opinion, simply reflects the normal ebb and flow of collection activities within the portfolio.

Stability and asset quality is a good thing, especially when your asset quality ratios are within the very favorable range that we have enjoyed over the past two years. I'm very proud of the job that our loan and credit personnel have done in credit underwriting and problem asset resolution. Over the last 18 months we have seen some effects of the slow-down in economic activity, including an uptick in personal bankruptcy filing, lay-off announcements, and business closings. But to date, these factors have not had a material adverse on our asset quality ratios.

While there is considerable uncertainty regarding the economy and the potential for acts of terrorism or geo-political events could adversely affect the economy in 2003, at this time we are reasonably optimistic about our asset quality outlook for this year.

We are pleased to report that our allowance for loan losses increased to $10.9 million, or one point five two percent of total loans as of year-end 2002. The increase in our allowance for loan losses in recent quarters reflects our cautious outlook regarding the current uncertainty about economic conditions, as well as the change in the mix and the size of our loan portfolio. As of our year-end, our allowance for loan losses was 498 percent of our non-performing loans. And we feel very good about this strong coverage ratio.

Next I would like to talk about growth and expansion. As most of you know, our stellar balance sheet growth in recent years has been accomplished by pursuing a successful growth and branching strategy. We opened our first expansion office in November of 1994, beginning our expansion from five original offices to today's 33 offices. We view each of these offices as a revenue pump. These offices are the source of the loan and deposit growth, which drives our net interest income growth and our growth and fee income.

The strong earnings growth that we have enjoyed over the last two years has been to a significant extent achieved as a result of revenue growth and offices opened in 1997, '98, and '99. As stated in his quote in our press release, this strategy works well as long as we hire talented people, acquire prime sites and good markets, and enter those markets at a time when a competitive opportunity exists. Most of the time, we seek far more opportunities for expansion than we can afford to pursue. We are committed to achieving excellent financial results for our shareholders in the short-term, even as we pursue the growth and expansion that we believe will produce good growth and earnings and financial results for shareholders in the long-term.

We are continuously reassessing this balancing act and asking ourselves this question: how many offices can we open this year in order to achieve strong revenue growth in the future, while still achieving our desired short-term results for shareholders?

And we think we hit the mark pretty well in 2002 as we achieved returns on average assets and average stockholder's equity of 1.56 percent and 22.46 percent respectively, while we opened five new offices increasing our number of banking offices from 28 to 33.

Based on our strong financial performance in 2002 and our positive outlook for 2003, we are now expecting to open six to eight new banking offices this year. We believe these offices are important elements in achieving strong balance sheet growth and income growth in future years.

We also believe that our 2003 results will be sufficient to absorb the expense of opening these new offices, while still achieving favorable results for shareholders.

In previous conference calls I've mentioned several fundamental financial goals that we pursue as a company. These goals include maintaining our efficiency ratio below 50 percent, which means we must achieve at least two dollars of revenue growth for each one dollar of overhead growth. And improving net income each quarter compared to the preceding quarter. In making our decision about the number of new offices to open in any particular year, we are guided by these goals as well as other criteria.

Those of you updating financial models would probably like some guidance on various growth parameters for 2003. During 2002 loans grew 16.5 percent, deposits grew 16.6 percent, and total assets grew 18.9 percent. These growth rates were consistent with our earlier guidance. We expect percentage growth for loans, assets, and deposits in 2003 to once again to be in the mid teens range.

Once again, our goal will also be to maintain our loan to deposit ratio in the range of 85 to 95 percent, as we have done this year. If you look at our quarterly loan and deposit growth numbers for 2002, you will not some substantial variation in the growth rates from quarter-to-quarter and once again, we would expect growth in 2003 to vary somewhat from quarter-to-quarter.

Let me also comment on net interest margin. Our net interest margin in the fourth quarter was 4.81 percent, which was consistent with the guidance on our last conference call. Our net interest margin declined from 4.96 percent in the third quarter.

Barring major movements in interest rates in 2003, or major changes in our competitive environment, we expect 2003 net interest margin to vary only moderately up or down from this fourth quarter level. At this time we expect to see quarterly net interest margin numbers in a range between the 4.96 percent range we achieved in the third quarter of 2002 and the 4.62 percent rate we achieved in the fourth quarter of 2001. I hope we'll average somewhere near the mid-point of that range in 2003.

Of course, predicting net interest is very difficult in today's environment because of the extraordinarily low level of interest rates, the considerable volatility of asset pre-payments, and the substantial uncertainty about the interest rate, economic, fiscal policy, and geo-political environment which may exist in 2003.

Additionally, it could occur that flattening yield curve could put further pressure on loan pricing and we also could see a high level of mortgage refinance activity as we have in recent months. And if this continues, we could see a high level of repayments from CMOs, which comprise a large portion of our securities portfolio. And this would result in reinvestment of those funds at lower rate.

If these things play out or develop in an unfavorable manner, we might experience some further pressure on net interest margin in 2003.

However, if we can continue strong growth in earning assets, we should be able to more than offset this and maintain a positive trend in quarterly net interest income.

Our fourth quarter non-interest income was very strong, contributing 25.4 percent of total revenue. This was a result of record income on deposit account service charges, record mortgage lending income, and record trust income. As well as the addition of income from the mid October purchase of $20 million of bank owned life insurance. As I have stated a number of times in recent years, we are, and we will continue to be, primarily dependent upon spread income for our bank's revenue.

However, we have consistently pursued achieving a higher level of fee income and our results throughout 2002 reflect continued improvement in this regard. We were particularly pleased with the improvement in service charge income in the fourth quarter as we continued to add many new customers and offer additional fee based services to existing customers. Our strong growth in mortgage income in 2002 reflect very favorably market conditions, coupled with an increased emphasis at our bank on this category of business.

In 2003, we expect deposit accounts service charge income to grow roughly in the same percentage as our growth rate of deposits. Mortgage income, of course, is very difficult to predict being highly sensitive to movements in interest rates and other economic factors. I've mentioned in several previous calls that we have a strong competency in the mortgage and we're working diligently to increase our mortgage share in the mortgage business by expanding our core of originators in existing markets and by expanding into new markets such as the loan production office we will be opening later this month in the north Dallas, Texas area.

Obviously, with plans to open six to eight new banking offices this year, along with the Texas LPO, and growth at existing officer, our overhead will increase in 2003. Our goal is to utilize our resources wisely so that we achieve at least two dollars of revenue growth for each one-dollar of overhead growth, thereby maintaining that sub-fifty percent efficiency ratio.

Once again, our stated goal is to continue to improve net income each quarter. This, of course, means reporting record income each quarter, and we've achieved this goal in 22 of the past 24 quarters. With the 53 cents of diluted earnings per share that we achieved in the fourth quarter, we have set a new and much higher level of performance. Of course, this level of performance makes it more difficult for us to achieve our goal of increasing earnings each quarter. Yet despite this higher bar, we still believe that this is a reasonable and achievable goal for 2003, assuming that economic interest rate and competitive conditions remain fairly stable. We are very excited about the opportunity to pursue this goal in the coming quarters.

Let me close my prepared remarks today by thanking each of you who have supported Bank of the Ozarks by owning our stock this past year. We appreciate your vote of confidence in this company and I assure you that we work hard each day to merit your trust and to achieve both the short-term and the long-term results that you deserve as shareholders. Also let me thank the seven analysts who currently provide research coverage on Bank of the Ozarks. Your support and interest in our company this past year is very much appreciated.

At this time, we will entertain questions. Let me once again ask to remind our listeners how to queue in for questions.

At this time I would like to remind everyone, in order to ask a question please press star then the number one on your telephone keypad. And we'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of of .

Morning, George. First of all, great quarter again. A couple of questions, and I'll just like them off and you can come back to them the way you want. The investment securities portfolio continued to grow pretty rapidly, even a little bit in excess of own growth. Just want to talk about the average duration and average maturity there. That's question number one.

Question number two is regarding the Dallas expansion. And I just want to make sure I heard it right, is that just a mortgage operation, or are you doing anything else down there?

And then question number three is with as extremely successful as you guys have been in your home state; there are numerous relatively large cities not that far away. Have you had any plans to maybe try your and expand your strategy, especially, in some of these other markets?

Again thanks, and have a great - and you had another great quarter. Thank you.

Thank you, and I appreciate the good questions. Let me take the investment securities portfolio first. Our portfolio at year-end was about 232.2 million, which was up about 17 million from the quarter ended September 30. We had not really planned on growing the portfolio much during the quarter, just had really planned on growing it pretty much in tandem with loan and deposit growth and normal balance sheet growth.

But we experienced throughout the fourth quarter a fairly high level of prepayments in the CMO portfolio and particularly in November and December the prepayment rates were fairly high there so we have accelerated our purchase or replacement securities trying to stay a couple of steps ahead of that avalanche of prepayments in the CMO portfolio and we'll probably continue to try to do that as long as it appears that the horizon for prepayments is going to be fairly steep out there.

I will comment that the prepayments in November really did catch up a little bit off guard and we were not able to get replacement securities in place quite as quickly as we would have liked and we ended for five or six weeks during the quarter with a fed fund sold position, which is a very unaccustomed position for us and that actually dinked our margin a basis point or two, so we're trying to stay ahead of that and avoid that in the future.

The duration of the portfolio is pretty much the same as it was. I think I reported at September 30 that the average life of our portfolio, or the average maturity was about 1.9 years and as of December 31 we still estimate based on expected prepayments speed to the mortgage portfolio that the average life of the portfolio is still about 1.9 years. We've touted that in the past as being an asset and that we didn't have a lot of duration exposure in the portfolio with the acceleration and prepayments there certainly an element of challenge there to replace those securities. But I feel like we're going to deal with that fairly effectively. But the number looks like 1.9 years on the duration.

The Dallas office, yes you're correct, it is primarily a mortgage office. It is a loan production office only. Our focus will be primarily on origination of residential mortgage loans, single-family loans, for resale on a non-recourse basis in the secondary market. We will, as we do here in our very successful mortgage operation in Arkansas, we will originate some construction development and some occasional commercial business from that office as well if we have the opportunity to do so.

And your third question about expanding into other large cities, we are - we're certainly not opposed to that, and you may see that in years to come from us. At this point in time, we feel like that we have the potential to grow our franchise to the, you know, five, six, even seven, eight billion dollar size, concentrating primarily on northern, western, and central Arkansas where we already have substantial operations or at least nearby to where we have substantial operations.

If a compelling opportunity arose to cross the borders, we're certainly not opposed to that. But barring some compelling reason to do so, our natural inclination will be to stay here and focus on the growth opportunities in our existing markets where we, you know, have some market awareness in the population. They know who we are and we have a pretty good reputation here, obviously, and we already have a knowledge of people and operating capabilities. So we're going to stay here unless there's a compelling reason to go elsewhere.

If our mortgage operation in Texas does as well as our mortgage people think it will, there's a very good possibility in a couple of years we could be talking about spending some full service operations off around that mortgage operation. But that remains to be seen, they've got to prove what they can do there.

Did that answer your question?

That was great. Thanks, George.

Thank you, . Appreciate your support.

Your next question comes from the line of with

Good morning, George.

, how are you doing?

I'm doing well. I just, not to try to pin you down too specific, but just kind of looking at the run rate and the numbers. In terms of expenses in the salary line, given that you had a booming year, hit all your bogies, did very well, coupled with mortgage contributing and is there any element of that overall salary expense level that if we assume mortgage slows down a bit would be nonrecurring in nature? Just trying to get a sense of what the fund rate there may be.

That's a good question and there are two things that I would comment on there.

OK.

Over the last couple of years we have converted to almost exclusively a commission based mortgage origination staff.

Yes.

Whereas if we'd answered this question two or three years ago it was almost exclusively a fixed salary with a small commission override.

OK.

And we have converted almost exclusively to commission based staff, so to some extent if there is a decline in mortgage origination volume the salary expenses will go down with it and if there's an increase in mortgage origination volume, the salary expenses will go up with it.

Right.

The second thing that we've alluded to in a general sort of way in the last couple of conference calls in regard to the increase in the salary line is that we are having exceptionally good earnings this year, very good year and we have made very good bonus accruals.

Right.

A sort of implied covenant that I have with our staff is if you produce outstanding results we're going to try to reward you with outstanding bonuses and the converse is also true. You know when we had puny results in 2000 we didn't pay anybody.

I remember those quarters.

And I do, too. I won't forget them for a long, long time. And it's a whole lot more fun to have great results and reward people with great bonuses. So we had a very strong level of bonus accruals throughout 2002 and that actually did click up in the fourth quarter and those bonuses are very much performance based.

OK.

If we put up excellent results, I'm going to stand up to shareholders and defend paying excellent bonuses and if we don't put up excellent results, I'm going to turn around to our staff and say, man, we only get paid if we do an excellent job.

Understood.

OK.

That's what I had. Thanks so much.

Thank you.

Your next question comes from the line with Morgan Keegan.

Morning, George.

Good morning, .

Couple of questions for you, one is fairly simple to answer. In your mortgage number it caught a little bit by surprise, but you have, you may have said it on the call and I may have missed it, but a break out of refi versus purchase for the current quarter. And then the second question is actually more of a discussion. Could you just comment on the competitive environment in your markets and do you see your competitors becoming more aggressive or less aggressive here as we seem to be reaching an inflection point economic?

OK. Let me hit the refi percentage first. In the fourth quarter, refi's accounted for 72.3 percent of our total volume. And purchase activity accounted for 27.7 percent.

Now, , let me qualify that. That refi percentage is not in practical terms as high as it sounds. The refi percentage includes loans where we have done the construction financing and then refi that construction financing out to the secondary market. And we have a very active and over the past several years have been very purposefully and deliberately growing out stable of builders that we do business with, which has helped to feed our pipeline of mortgage business and a sizable chunk, and I don't have a breakdown on this, but a sizable chunk of that refi activity was actually construction loans or swing loans that we had on the books taken into the secondary market.

So probably if you pull that out, probably the refi activity was, you know, it was probably much closer to 50, 50, but I'm sort of guessing at that number. But a substantial piece of that refi was construction loan business that was completed and then refinanced in a permanent market situation.

Your second question, I'm sorry.

Competitive environment.

Competitive environment. , at this point we are - we are not saying a lot of change in that. You know, as I've alluded to in several recent conference calls regarding that question, we think we're in a very competitive environment. I'm probably like every other banker in the country in that I think that there are too many banks in my market building too many branches and advertising too much and paying too much on CDs and charging too little on loans, but I think the competitive situation here has been aggressive. I think it continues to be about as aggressive as it has been and, you know, we've become accustomed to competing in a very competitive environment and I think we're doing a pretty good job with it.

At this point, I don't see anything that's going to materially affect that or that I think will materially affect that. We have had a couple of competitors who've announced they're going to open several more branches in some of our markets but at the same time we're opening a number of new branches in other markets and, you know, that's just - that's the way of the world now. So we don't think that's going to really disrupt things in the coming year.

OK, fair enough. Good quarter, George.

Thank you very much.

At this time there are no further questions.

If there are no further questions, we appreciate you guys participating in the call today and we will look forward to talking with you in about three months. Thank you very much.

Thank you for your participation in today's conference call. You may all now disconnect.