Bank Ozk (OZK) 2003 Q1 法說會逐字稿

Good morning. My name is Mandy, and I will be your conference facilitator. At this time I would like to welcome everyone to the Bank of the Ozarks first quarter earnings release 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," "1" on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Mr. Randy Oates. Sir, you may begin.

Good morning. I'm Randy Oates, Marketing Director for Bank of the Ozarks. The purpose of this call is to discuss the company's first 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 will 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, net interest income, noninterest income, including service charge income and mortgage lending income, noninterest expenses, our efficiency ratio, asset quality, interest rate 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 management's discussion and analysis section of our public reports filed with the SEC. Forward-looking statements made by the company in 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. Now let me turn the call over to George Gleason, our Chairman and Chief Executive Officer.

Thank you for joining our call today. We are, of course, very pleased to be reporting excellent first quarter results. As our press release stated, this is our ninth consecutive quarter of record net income and earnings per share. We are certainly proud of this achievement and we hope to keep this streak going.

We have now posted record net income in 23 of the last 25 quarters. Our first quarter net income of $4,475,000 was a 44.6% increase over last year's first quarter net income. Our diluted earnings per share of 56 cents was a 40% improvement from the first quarter of last year and was a 3 cent per share improvement from the immediately preceding quarter. We very pleased with our 1.73% return on average assets and our 24.3% return on average equity for the quarter.

Let me discuss some other highlights of the first quarter and also give some guidance regarding our expectations for the second quarter and beyond. First let's discuss asset quality. At March 31, our ratio of nonperforming loans to total loans was 27 basis points. That's an increase of five basis points from March 31 of 2002 but is down four basis points from year-end 2002.

Our March 31 ratio is the third best ratio of nonperforming loans that we've reported at any quarter end since we went public in July of 1997. Our nonperforming assets at March 31 were 21 basis points of total assets which is down one basis point from March 31 of 2002 and down three basis points from year end 2002. This is the best ratio of nonperforming assets that we've reported at the end of any quarter since we went public.

Our ratio of loans past due 30 days or more, including past due nonaccrual loans as a percent of total loans was 77 basis points at March 31. That's down two basis points from March 31 of 2002 but up two basis points from year end 2002. Our annualized net chargeoff ratio for the first quarter was 32 basis points of average loans. That is somewhat higher than our chargeoff ratio for the full year of 2002 which was 22 basis points and is even slightly higher than our five-year average chargeoff ratio of 28 basis points.

Of course, this ratio tends to move around from quarter to quarter, and at this point we don't see the first quarter chargeoff number as indicative of an adverse trend. At March 31, all four of these ratios were very good. The moderate quarter-to-quarter movement in these ratios simply reflect, in our opinion, the normal ebb and flow of collection activities within the portfolio. I continue to be very proud of the job that our loan and credit personnel have done in credit underwriting and problem asset resolution.

Over the last two years, we have seen some effects of the slowdown in economic activity, including an uptick in bankruptcy filings, layoff announcements and business closings, but to date these factors have not had a material adverse effect on our asset quality ratios. In fact, some of our asset quality ratios at March 31 were at or near the very best we have achieved in the past five years or more. While there continues to be considerable uncertainty regarding the economy, including the potential for adverse effects from the war with Iraq, the continued threat of terrorism and other geopolitical events, at this time we remain cautiously optimistic about our asset quality.

The Arkansas economy is certainly not immune to the challenges facing our national economy, but there are some indications that our local economy is faring better than some. For example, the U.S. unemployment rate for January of this year was 5.7% while our Arkansas unemployment rate was 4.9%. In the 14 counties in which we operate in Arkansas, the weighted average unemployment rate for January was also 4.9%, which is .8% below the national average.

We are pleased to report that our allowance for loan losses increased to $11.1 million or 1.52% of total loans as of March 31. This increase and our allowance for loan losses in recent quarters reflects our continued 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 the end of the first quarter, our allowance for loan losses was 569% of nonperforming loans. We feel very good about this strong coverage ratio. We will maintain a focus on credit underwriting and problem asset resolution in the quarters to come.

Next, I would like to talk about loan and deposit growth. Let me first say that my discussion regarding loan and deposit growth does not include the loans and deposits we expect to add as a result of the planned acquisition of RVB bank shares later this quarter. Our loan portfolio grew $13.7 million during the first quarter. Due to several seasonal factors, the first quarter has historically proven to be a challenging quarter for loan growth.

Because of these factors, our first quarter loan growth was somewhat subdued, but was still better than last year's first quarter loan growth of less than $1 million. Our loan portfolio has grown 18.6% over the past 12 months, and it grew 16.5% in calendar 2002. Our pipeline of new loans looks good as we enter the second quarter, and we now expect our loan growth percentage for the coming quarters to be in the mid teens to high teens on an annualized basis.

Unlike loans, our deposit growth was $74.7 million in the first quarter, was very strong. This deposit growth was broad based across our spectrum of deposit products and sources. We were very pleased to see continued strong growth in our number of core deposit customers. Our growth and Denovo branching strategy has continued to result in the addition of large numbers of core customers each quarter. These include retail customers, as well as commercial and public funds customers. Our deposits have grown 28% over the past 12 months and they grew 16.6% in calendar 2002.

We now expect our deposit growth percentage for the coming quarters to range from the mid teens to the high teens on an annualized basis. As you will note from our balance sheet, our strong first quarter deposit growth allowed us to substantially reduce short-term borrowings toward the even of the first quarter. The slow quarter of loan growth, combined with our robust first quarter of deposit growth, pushed our loan-to-deposit ratio down to 84.6% at March 31 compared to 90.9% at year end.

The current ratio is slightly below our target range of 85% to 95%, and over the next several quarters, we plan to work our way back toward the middle of our target range. Now, we certainly don't want to slow our growth rate of core deposit customers. So our solution is to work hard to achieve our targets for loan growth. Let me next discuss our net interest margin. Given the lower loan-to-deposit ratio in the first quarter, we were pleased with our 4.81% net interest margin. This was exactly the same as the 4.81% margin for the fourth quarter of last year.

In our January conference call, we gave guidance on our expectations for 2003 net interest margin and our first quarter results were right on target with the actual margin of 4.81% being two basis points above the midpoint of that guidance range. Obviously, the lower loan-to-deposit ratio makes it somewhat more challenging to maintain this level of net interest margin for the remainder of the year, but as I have already stated, we hope to improve our loan-to-deposit ratio from the current level in coming quarters. Of course, predicting net interest margin in today's environment is very difficult because of the extraordinarily low level of interest rates, the considerable volatility of prepayments, and the substantial uncertainty about the interest rate, economic fiscal policy and geopolitical environment which may exist in the coming quarters. A flattening yield curve could put further pressure on loan pricing and we have also seen a high level of mortgage refinancing activity in recent quarters, and this has resulted in a high level of repayments on the CMOs which comprise a large portion of our securities portfolio.

This high level of repayments may continue for several more months and may result in continued reinvestment of these funds at lower rates. If we cannot continue to offset these reductions and securities yields and loan yields with a reduction in our cost of funds, we may experience some further pressure on our net interest margin from the 4.81% level achieved over the past two quarters. During the first quarter, we reduced our cost of funds on interest-bearing liabilities, including deposits, by 19 basis points compared to the fourth quarter of 2002, and this was sufficient to offset our 16 basis point decline in earning asset yields for the same period.

Given the historically low interest rate levels and the resulting prepayments in loans and securities, this is to say the least a very interesting time to be managing net interest margin. Let me update you on our denovo branching and acquisition plans for 2003. In our January conference call, we reported that based on our strong financial performance in 2002 and our positive outlook for 2003, we expected to open six to eight new banking offices this year.

We stated our opinion that these offices are important elements in achieving strong balance sheet and income growth in future years. We also stated our belief that our 2003 results would be sufficient to absorb the expense of opening these offices while still achieving favorable results for our shareholders. I'm pleased to report that we still expect to open six to eight new banking offices this year and still expect that we can do this without sacrificing our short-term performance goals. In fact, as we mentioned in the press release, we now expect to open four new banking offices in the second quarter.

These include a third Conway office, which we've already opened earlier this week; a second Bryant office expected to open later this month; a seventh Little Rock office expected to open in May; and a temporary Cabot facility which we expect to open also this month. We had expected to open two of these offices in the first quarter, but construction delays pushed these openings into the current month. We are comfortable with our ability to effectively manage all of these office openings, and we are very excited about the prospects for each of these offices. Obviously opening all four of these offices in one quarter concentrates a chunk of overhead growth in this second quarter.

During the first quarter, we had a number of the employees who will staff these offices on our payroll for all or a portion of the quarter, and thus a portion of the overhead cost of these new offices is already reflected in our first quarter results. During the second quarter, we expect our overhead to increase as much as $200,000 pretax as a result of the final staffing and opening and initial operation of these offices. As you know from our previous conference calls and filings, we are very focused on our efficiency ratio.

We were very pleased to report further improvement in our efficiency ratio during the first quarter to 45.1%. This is the best efficiency ratio that we have reported as a public company and was our seventh consecutive quarter with a sub-50% efficiency ratio. A recent article in "American Banker" listed the most efficient of the 500 largest U.S. bank holding companies for the first nine months of last year. We were very pleased to have earned the 41st best efficiency ratio among the 500 largest U.S. bank holding companies.

I think our managers deserve special congratulations for this achievement in light of the overhead growth which is inherent in our denovo branching strategy. Our second quarter efficiency ratio may not be quite as favorable as our first quarter ratio due to the cost of opening these four new offices and certain conversion costs associated with the RVB acquisition. But our short-term goal is to continue to maintain our efficiency ratio well below 50%, and our long-term goal is to improve that ratio further from the current level.

Our first quarter noninterest income was good, contributing 23.8% of total revenue, that compares to 19% and 21.9% of total revenue respectively for the first quarter and full year of 2002. Deposit account service charges and mortgage lending income were off their record pace of the fourth quarter, although both continued at favorable levels. First quarter trust income was another record, and in the first quarter we had the full quarter's impact from the mid-October 2002 purchase of $20 million of bank-owned life insurance.

As I have stated a number of times in recent years, we are and will continue to be primarily dependent upon spread income. However, we have consistently pursued higher levels of fee income and we will continue to seek to improve this category of income in 2003. Despite the fact that we continued to add many new customers in the first quarter, our deposit account service charges declined from the fourth quarter level. We believe this decline was a result of seasonal and weather-related factors. For example, the first quarter has one or two less days than the other quarters of the year and is further diminished by having three banking holidays.

In addition, during February we had one week of snow and ice which virtually shut down business activity in our markets for two days and significantly reduced the level of activity for the remainder of that week. We believe these factors negatively affected our service charge income, although it was still up 11.2% compared to the first quarter of 2002. For the full year of 2003, we expect service charge income to grow roughly in tandem with our growth in non-CD deposits.

Our first quarter mortgage income was slightly off the record fourth quarter of 2002 pace, but was still our second best quarter of mortgage income ever and was up 111% over the first quarter of 2002. This reflects the favorable market conditions, coupled with our continued emphasis on this category of business. We have a strong competency in the mortgage business and we are working to increase our market share. We are doing this by expanding our core of originators in existing markets and by expanding into new markets such as the loan production office we opened in February in the Dallas suburb of Frisco, Texas and the mortgage staff we added in our new loan production office in Russellville, Arkansas.

Of course, mortgage income is very difficult to predict, being highly sensitive to movements in interest rates and activity in the housing market. With that said, I will comment that our mortgage pipeline for April looks very good at this point. On March 11, we signed a definitive agreement to acquire RVB bank shares in Russellville, Arkansas. At year end RVB had $54 million in assets, $45 million in loans, and $49 million in deposits. We already had plans to enter the Russellville market this year, having purchased two sites for future development.

The opportunity to acquire RVB will facilitate our development of that market and complement the three branches that we expect to add there over the next two years. We believe this is a good transaction for all parties concerned as we are paying 1.75 times RVB's fully diluted year-end equity, or approximately 14.6 times their 2002 earnings. We expect this transaction to close toward the end of this quarter. We do not expect the transaction to have a material effect on our 2003 earnings, and we believe it will be slightly accretive to our 2004 earnings.

However, we do expect to incur about $100,000 of pretax expense in the second quarter related to termination fees on RVB's data processing and other contracts and the cost of converting to our systems. In conclusion, let me restate as I have done many times before, that our goal is to continue to improve net income each quarter. This, of course, means reporting record income each quarter, compared to the preceding quarter. We have achieved this goal in 23 of the past 25 quarters. The 56 cents of diluted earnings per share achieved in the first quarter, which resulted in a return on average assets of 1.73% and a return on average equity of 24.3% pushes our future targets to a higher level.

Of course, this level of performance makes it more difficult to achieve our goal of increasing earnings in the remaining quarters of this year. Despite the higher bar, we still believe this is a reasonable and achievable goal for 2003, assuming that economic interest rate and competitive conditions remain fairly stable. We're excited about the opportunity to pursue this goal in the coming quarters, and we look forward to the challenge. At this time we will entertain questions. Let me once again ask Mandy to remind our listeners how to queue in for questions. Mandy?

At this time I would like to remind everyone, in order to ask a question please press "star," "1" on your telephone keypad. Your first question comes from Joe Stiven.

Morning, George. First of all, great quarter. George, a couple of questions. Could you talk first about how your LPOs are going in Dallas and Charlotte. That's number 1. Number 2, I'm not trying to wordsmith you but it sounds like from the last quarter to this quarter, you are actually talking about loan growth even getting better for you. So maybe I'm just reading into just a few little words but -- and so really just comment on those two things and again, great quarter, George. Thank you.

Thank you, Joe. Well, let me comment first on the LPOs. We had hoped to get our Dallas LPO going in early January because of some delays in completing the space there, I think we actually opened on February 3. So we spent a chunk of the month of February just getting started and producing volume. They are producing a pretty good flow of loans there. And we believe that will continue to increase as they get established. We have now four originators working in that office and a couple of other staff folks there. So we have a strong team there and we are very optimistic about how that is going to go. That is an important part of our plan to expand our mortgage origination capabilities.

As I've commented several times in the past, Joe, we know that at some point the mortgage pie will shrink, that we will not always have as good of a mortgage origination market, either refinances or new originations as we have enjoyed over the last year-plus, and our goal is to continue to expand our capabilities in that regard with the commissioned originators so that our cost structure moves in tandem with our origination volume and because we have more originators, we increase our market share, thus mitigating the effects of any future downturn in the mortgage market. Secondly, you are exactly right on our comments on loan growth. The commentary we gave in the first quarter conference call was mid teens. We are now saying mid teens to high teens on both loan and deposit growth for the remaining quarters of the year. We are cautiously optimistic that we may be able to raise our goals a bit there.

Thanks, George.

Thank you, Joe. Appreciate it.

Again, if you would like to ask a question, please press "star," "1" at this time. Your next question comes from Ross Haberman.

How are you, George? Nice quarter. I got on a little late. I just wanted to ask you the question, given flat interest rates through the rest of the year, how do you see that scenario affecting your ongoing spread?

Ross, we feel like we are pretty close to a neutral interest rate position. I would call your attention to Page 22 of our annual report. I'm confident you have a copy of it.

Yeah.

The little table there in the page that shows the interest rate movements that we would project as of year end for an up-and-down 100 and 200 basis point scenario shows fairly modest and manageable movements in those margins. Now, of course, those, that scenario is all predicated upon a flat or a unchanged slope of the yield curve and, you know, if we do get a flattening of the yield curve that puts substantial pressure on loan pricing, that could be a challenge.

As you know, we are at historically low rates and it does not create a lot of room to maneuver down here on the down side as the fed continues to cut rates, but as this point we believe if the fed cuts another 25 or 50 basis points that we still do have room to pretty much offset that on a dollar-for-dollar basis. In fact, the model says that would actually be slightly favorable to us, although we would probably settle for break-even under those sort of scenarios. But we feel like we're pretty well positioned for a flat to unchanged to up or down slightly 50 to 100 basis point sort of environment. So we feel good about that.

And just one other question. Did you spell out how accretive the little -- the bank that you announced the acquisition of that was a month or two ago, how accretive that was going to be; and if so when?

We did not spell out specifically. We said slightly, Ross, and that it would be accretive next year. Now, to give a little bit more color on that, the way we ran our numbers assumed that even with this $100,000 of conversion costs that we will incur in the second quarter, assuming that transaction closed converting their system that it would be neutral really over first 12 months of the transaction. So it will cost us a little bit in the second quarter because of those conversion costs and thus we should capture that back over the next couple of quarters. The 2004 accretion, we used the word "Slightly," and you should probably interpret that as a penny or two a share. It would be our expectations in that regard per annum. It's a very small transaction, $7.1 million total purchase price and $55 million in assets. So it doesn't move our numbers much one way or the other.

Okay. Thank you. The best of luck.

Thank you. Appreciate your questions.

Your next question comes from Ariel Whitman.

Hi, guys. Great quarter. I have two questions. The first one focuses on credit quality and the other one focuses on trends in your region. Although you adequately provided for chargeoffs and loan growth in the quarter, I'm wondering if you could comment on the types of industries associated and the chargeoffs, if there's anything systemic or anything notable in your region? And then the second question, I just wanted -- was wondering if you could comment on anything related to Wal-Mart in your area and any type of moving trends, both company and people?

Okay. Ariel, I'm -- I don't know that I can give you a lot of guidance on the trends in our area because I'm not really aware of any specific regional trend that would be relevant to our numbers.

Okay.

I think that really answers that question.

That's fine. No offense.

The chargeoffs that we incurred in the first quarter were pretty much spread throughout our portfolio. Not related to a specific sector at all. So, you know, I think that's healthy. It was the normal ebb and flow of our activity. This quarter was a little higher than the quarters we've been experiencing but at the same time it was three basis points lower than the fourth quarter of 2001.

So it was not really out of the range that we've experienced over the last couple of years in the ebb and flow of that. So don't really see any adverse trends developing. Now, obviously we read the same papers and economic statistics that you do, and this economy is very fragile here. So we are cautious and careful in our outlook toward the future, but at this point we're feeling very positive about the asset quality.

Okay. Thank you.

Thank you. Appreciate the questions.

At this time there are no further questions.

If there are no further questions, we thank you for listening in to the call today, appreciate your support for Bank of the Ozarks, and look forward to speaking with you in about 90 days or so. Thank you very much.

Thank you for participating in today's conference call.