Bank Ozk (OZK) 2014 Q4 法說會逐字稿

Good morning, and welcome to the C1 Bank financial fourth-quarter earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Trevor Burgess. Please go ahead.

Good morning, everyone. I'm Trevor Burgess, and I'm the President and CEO of C1 Financial and C1 Bank. I'm joined today by our CFO, Cristian Melej.

The fourth quarter was focused on establishing new lending relationships, and as a result we experienced significant growth in the C1 Bank originated loan portfolio. During the fourth quarter, we were also recognized for our innovation and our growth. And this recognition helped our brand and, I believe, has enhanced our loan pipeline as we entered 2015. SNL Financial ranks us as the sixth fastest growing bank in the country since 2009. Our re-release of the Mercedes-Benz $1 million CD made it into publications across the US, and we actually had a taker this time. And most importantly, I was honored as American Banker's Community Banker of the Year.

We are quickly transitioning from being a West Coast of Florida bank to a bank that serves the needs of entrepreneurs across the state. We are allocating more resources to our Miami and Orlando operations, and we are excited by the early returns.

We have started January with a bang and are honored that so many of Florida's business women and men are deciding to bank with C1 Bank. In fact, so far in January we have closed as many loans as we closed in the entire first quarter of last year.

In the fourth quarter, C1 Bank originated $139 million in new loans relationships, which brought total 2014 loan originations to $489 million. The balance of C1 Bank originated loans grew by 11% in the quarter and 37% during the year. C1 Bank originated loan balances increased to 71% of the total portfolio, up from 58% of the portfolio at the end of 2013 as our required bank loans run off, which we view as a positive change.

Strong originations led to modest increases in unfunded commitments to $189 million. The majority of the unfunded commitments are construction loans with scheduled draws that will help increase loan balances outstanding in 2015.

We have been able to maintain a strong adjusted net interest margin, which excludes the effect of accretion from acquired banks, increasing 2 basis points during the quarter to 4.05%. While we were able to decrease the excess cash on the balance sheet to $51 million by quarter end, the average excess cash balance of $127 million reflects loan funding that was heavily weighted at the end of the quarter. As a result of late fundings, we did not see the full effect on adjusted net interest margins, but the math bodes well for 2015, all else being equal.

We've also been able to improve our net interest margin with a continued focus on core deposit growth. Core deposits now account for 73% of total deposits, up from 67% at the end of 2013. This helped us continue our trend of improving cost of deposits, which decreased another 2 basis points in the quarter, ending at 50 bips. We now have three branches in the Miami market, with a fourth scheduled to open in March. We believe Miami will be a big driver in continuing to lower our costs of deposits.

Growth of loans outstanding, combined with an improved deposit mix during the quarter, also helped us increase our net interest income by more than $900,000 compared to the third quarter.

The asset quality of the C1 Bank originated portfolio remains strong, accounting for less than 1% of the non-performing assets of the entire portfolio. Our Texas ratio fell from 53% at the end of 2013 to 29% at the end of 2014. Now, we did get some annoying appraisals in the fourth quarter, as we wanted to check the carrying value of acquired classified assets. Most of these related to our FDIC-assisted acquisition of First Community Bank of Southwest Florida, where a year ago we had to make judgments as to fair value and needed to check them at year-end 2014.

We of course hope to be able to sell the properties for more than the appraised values and are acutely focused on selling our remaining OREO, finishing the remaining foreclosures and collecting on deficiency recoveries. Reducing the classified asset balances from our acquired banks will help reduce costs and allow us to redeploy the resulting cash into new loans.

We sold approximately 60 properties in 2014 and have approximately 90 remaining, with about 30 notes still under foreclosure. While exceedingly hard to predict, we did collect $2.4 million in deficiency recoveries in 2014, helping to fund the growth in our general allowance for loan loss on our performing loans.

A general allowance for performing loans increased by 83% in 2014, while overall performing loan balances were up just 13% relatively.

We hope to provide a full update on C1 Labs and our technology initiatives in the next few months and are excited by the relationship enhancements and productivity gains we are seeing from that development work. I encourage everyone to check out our new SBA First application for iPhone and Android. It's a neat client acquisition and education tool, and we are excited by our first few weeks of testing in the Florida market.

I really want to take the opportunity this morning to answer as many questions as possible. And with that, I will open it up. Operator?

(Operator Instructions) Michael Rose, Raymond James.

A couple of questions here. Obviously a pretty strong loan growth this quarter. I wanted to dig into where that loan growth came from, by market geography. And then if you can kind of talk about the SBA trends in the quarter, maybe what you originated this quarter versus last quarter. Obviously, the gains are down, but my thought process would lead me to believe that with the new app and the focus on SBA that your originations actually increased over time. Thanks.

Thanks. We saw very strong loan growth on the West Coast of Florida, which surprised me a bit. Miami has been a great new market for us for the past two years and continued to represent a meaningful portion of our loan growth and new relationships. But Southwest Florida, areas like Fort Myers and Naples, are actually coming back now and are good fundamental markets driven by core business needs that are easy to understand.

So we were excited that those markets are producing good loan growth as well. Miami accounted for about a third of our new loans originations. And Orlando, which we opened midway through the year with a loan production office, had a great first six months, and we are excited about the pipeline that see there. But definitely the West Coast of Florida outperformed our expectations.

SBA has been a key focus for us and will continue to be. We were very happy with SBA loan originations in 2014, and we see the trend continuing in 2015. We would like to get them to the place where they represent 10% of our originations; that would be a great number. The challenge with the SBA 7(a) program is predicting when loans will finish funding and when they will sell. So there can often be a three- to six-month lag between originating a loan and it being able and ready to be sold in the market. So there are a number of loans that are in the pipeline to be sold here in the first quarter that were originated in the third or fourth quarter of last year.

The SBA First app has been out for a couple of weeks now in a silent testing mode, and we have had a really good response from small to medium-sized business owners who are using it to help educate themselves on the SBA program. But it also provides us with really interesting data about what sort of loans our potential clients are looking for from the SBA program, and we are considering adding some additional products to our SBA roster such as the SBA Express program. So SBA will be a big focus hours for 2015.

Okay. And then as a follow-up, I noticed that you purchased some BOLI in the quarter. Can you give a sense for kind of what you expect from an income perspective from that purchase?

Sure. Cristian, I'll ask you to give the specific numbers. We have looked at BOLI for a number of years. We have some BOLI on the books that we acquired with our First Community Bank of America acquisition. But we had some good room available on our capital structure, and it was a good use of cash. As everyone knows, we are very conservative when it comes to being asset sensitive. And so we established a relatively conservative duration profile, probably a much shorter-term duration than a normal allocation to BOLI would have, but we think that will bode well in the long term. But, Cristian, can you answer Michael's question as to anticipated income effect once the BOLI is fully invested?

Yes, of course. Good morning, Michael. We expect that this on a normalized basis would add close -- around $900,000 to our bottom line. However, the first year is going to start a little bit lower, as it's going to take probably one to 1 1/2 quarters to fully invest. We probably will not see these kind of numbers in the first quarter, but towards the end of the year it should reach this level.

Okay. That's helpful. And then one final one for me -- just can you give us an update in terms of any staff additions on the lending side during the quarter? Maybe how many you have at this point, maybe where you are looking at? Thanks.

We started the year with 25 lenders across our product range, and that's up from a year ago meaningfully, at least by eight lenders. So -- and we have allocated those in Miami, Orlando and the Naples-Fort Myers area. So that's where we have seen growth.

I think that we've got the right team. While we have eight new, we also -- eight additions, we have more than that are new in the past year, as people who were not able to perform to our expectations were replaced by people that we believe can do better. We were really happy with $489 million of loan originations, and I really looked at the momentum we have going into 2015. Last year's first quarter was a $46 million origination quarter, yet we did $489 million in the year. If we can do something closer to our current run rate, we will have obviously much better outcomes as we'll earn on loans for the entire year.

Great. Thanks for taking my questions.

Stephen Scouten, Sandler O'Neill.

A question -- a couple of quick little nips and ties here, first. Cristian, on the $900,000 that you mentioned there from the BOLI, is that kind of a yearly run rate once it's fully ramped up?

Yes.

Okay. Great. And then what are you guys thinking for a tax rate in 2015? I know you said in the release it was obviously higher than you would have expected this quarter. What do you think is an appropriate tax rate?

Based on our projections for this year for income, we think it should be around 38.5%.

Great. And then talking about the loan growth, obviously, as Michael said, it was another strong quarter of loan growth. Now, I was probably thinking that we would see a little bit more impact from the unfunded commitments, which obviously grew nicely yet again. How can we think about when we'll see kind of that inflection point of that benefit? I know you said before it's 12 to 18 months, and there's draws there and so forth on the construction. But I guess can you speak to how much of an impact that would have had in this current quarter and kind of how we can expect that moving forward?

It's hard to perfectly predict because it's something that's outside of our control. But we know what the draw periods are for our construction loans, and they do fall into the 12 to 18 and once in a while 24 months. So I think what we saw in the fourth quarter was slightly delayed funding of those unfunded commitments, and we certainly hope that -- they are building the buildings, they will need to fund it at some time and we certainly hope 2015 is the time that that will happen. Because otherwise the commitment will expire. But the buildings are under construction; we monitor them very closely. But I would say that they have been able to -- they are just a little delayed on some of the draws.

Okay. Fair enough. And from an average loan size perspective in the quarter, do you have any details available about amount of credits you originated on that total volume and what average loan size was in the quarter?

Yes, I will give you for the year. We originated approximately 400 new loans, which equates to about an average size of $1.2 million.

And did that continue to grow late in the year? I know you said last quarter it was kind of growing, obviously as your new credits overwhelmed your legacy credits.

No, it was pretty similar -- new credit origination throughout the year was very similar quarter to quarter.

Okay. Perfect. Perfect. And then one last question for me. With the rate environment now, I know you all's view on asset sensitivity is a lot about risk mitigation, maybe even more so than it is trying to guess what interest rates are going to do. But does your view change at all on your asset sensitivity or the way you think about interest rate management based on what we are seeing in the rate environment today?

I'm not sure what we are seeing on the interest rate environment today, so what I've got to do is just try to onboard the absolute best relationships possible. And we have been very conservative in our funding. We continue to look for opportunities to use the Federal Home Loan Bank to do long-term fixed-rate funding. Given that we make a lot of five-year loans, let's do a lot of five-year match funding. And we have been able to -- to this point -- capture a very good spread.

I look at our yield on loans, excluding purchase accounting -- and I've got a little chart here -- if I go back to 2010, it was 5.63%, 11%, 5.58%, 12%, 5.50%, 13%, 5.63% and [14 565]. We have been able to have amazingly flat and consistent yield on loans. And if we are able to continue in that vein or not even that good, given our change in our cost of funds and improving deposit mix, the math is pretty easy to do. We continue to be very conservative in terms of making long-term fixed-rate loans and that we don't do it. That means we walk away from a lot of business. There is a huge amount of business that we do not do because we are not willing to do fixed rates beyond five years, and those are loans that other banks are doing.

Okay. Great. Thanks, guys.

Joe Fenech, Hovde Group.

Trevor, just a big-picture question here to start -- totally get that you guys aren't as focused. You made the point on quarter-to-quarter gyrations. And some of these categories that you mentioned are definitely a little volatile and tough to predict. But having said that, how do you balance that long-term focus against the need to meet bottom-line earnings expectations in the short term in order to build the credibility necessary for investors to be comfortable in valuing the stock off of some of those longer-term performance targets that are out there?

Sure. I think key to that is to look at the trends in reducing classified assets as a critical component at removing volatility. So our ability to sell 60 properties last year and have only 90 left with only 30 notes still under foreclosure, that's going to be a key focus for this year is how do we reduce the amount of OREO that we have on the books, which will reduce costs and will reduce volatility.

I think that the loan originations, our new relationship originations, is the biggest driver of putting more dollars on the bottom line. So it's translating into funding in the short, medium, and long term is the absolute biggest driver. You see outside of OREO our costs are very controlled, and so this is really a revenue driver game. We've given our originations and our pipeline; I feel very good about that.

Okay. And in terms of performance targets for this year, any rough targets you can give us in terms of the pace of the trajectory of the earnings improvement we are likely to see or any of the components of the earnings where you are comfortable giving specific targets or ranges?

No. I think that what we are really focused on is just originating great new relationships. And if we can do that at the pace we have been doing it, the math is easy to do as to how things flow to the bottom line. We do not have any major cost increases coming. We are opening a branch in Doral in March, and we are opening a branch in North Tampa in March. But we are also relocating our Franklin Street branch in downtown Tampa to a branch very nearby that has superior parking and drive-throughs and that we own instead of lease. So we are trying to be very focused on our expense control at the same time.

So I don't anticipate any real changes to our cost structure, and so it is a leverage model based upon growing great new relationships.

Okay. And then lastly, anything you are seeing, Trevor, anywhere in Florida that bothers you from a credit standpoint? Not in your portfolio necessarily, but just generally in your observations around the state?

I think the two things that we are avoiding and that -- I'm very happy with 489. So we could have done hundreds of millions more if we were willing to do two categories of things. One is longer-term fixed rates, as I talked about, and we see a lot of that in the marketplace. Very low rates for very long terms that other banks are doing and we are not. I think it's obvious why that makes us nervous.

And the second thing is I believe that vertical construction, especially in Miami-Dade County, is something that we are starting to see some real construction cost increases. And if there are a lot of presales, have the ability to erode developers' margins rapidly. So that's an area that we are avoiding as the vertical construction market in Miami.

Okay. Thank you.

Kevin Reynolds, Wunderlich Securities.

I guess a couple of questions I had -- three of them, specifically -- one has sort of been touched on, but I want to take it a little bit differently. I want to ask -- the first question -- I know Florida is not an energy state. I know you are not an energy bank. But it seems to me that with all the fears and concerns out there in the energy space and what that might be -- what we might be able to interpret from that as it relates to the level of economic activity, that it is probably more of a positive for the state of Florida than a negative. And so I'm wondering if you can comment on that and what you think is sort of generally the economic outlook might be in Florida. I guess as well a flattening of the yield curve and what that could do for consumer confidence with mortgage activity and possible refinance activity picking up.

I think it's net positive for Florida because, as we sort of read in the paper, as you put $750 in the average American's pocket for a year, that has a big impact, especially where you have a lot of retirees and the like. So when I look at our acquired loan portfolio, we certainly would view that as a positive thing if more people have dollars in their pocket that will help them to make their loan payments. So we view low gas prices as a net positive.

It may also help and mitigate some of the construction cost increases, which would be helpful to the state of Florida as well, where you have very large population increases each year -- 250,000 people last year. Lower gas prices for new construction will be helpful in mitigating some of those other construction cost increases. So we view it as a positive for our business and a positive for Florida.

Okay. Next question on -- I don't want to get this cart in front of the horse too far, but sort of M&A appetite -- it seems that in the last six months or so that activity level or at least the focus of banks wanting to come into Florida has picked up a bit. Maybe pricing has come up too. What are your thoughts on M&A with you as an acquirer were out there? Could you remind us what kinds of banks might be of interest to you? Talk about your pricing discipline and then whether or not you think that the environment is changing to the point where it may not be -- or may or may not be an opportunity for you if pricing continues to inch a little bit higher?

Sure. We look at what is the risk-adjusted incremental return on equity of doing acquisitions versus doing organic growth. And given our pipeline of new loans and our origination history, we have originated nearly $1 billion in loans in the past two years. So it is -- it is hard to think about how you could receive a better incremental return on equity by doing acquisitions and taking on all their costs, problems, infrastructure, people, branches, et cetera when we have had very good and our confidence in our ability to continue to onboard great new relationships.

So I know that if we were trading at a much higher multiple of book, a lot more things -- the math makes a lot more sense for a lot more deals. But at this point, we are laser focused on just originating great new relationships, putting more earning assets on the books and increasing the bottom line.

Right. So it sounds like you -- translated another way from my side of the table, you are essentially adding a bank a year without having to issue any new shares.

Yes.

In terms of your growth rate.

Yes.

I guess last question that I have is going back to recruiting. I know you talked about what you've done and where you would like to add. But I just wanted to sort of ask a question about the awareness of your Company. With all the press that you've gotten, with all the progress that you've made and the awards that you have received, has the awareness improved meaningfully where it's easier for you to have those conversations or to maybe close the deal when you get into the courtship process with those lenders that you are looking to add on? Do you think it's going to get a little bit better for you as you do that, and are you starting to see that early progress of being a better known commodity out there in the state of Florida?

I definitely think that the increased awareness of C1 Bank across the state and the branding that has taken place over the past couple of years is translating into our ability to acquire really high-quality lenders. I looked at the person we added in Orlando, a new person we added in December in Miami and a new person we added in the fourth quarter in Naples-Fort Myers. All came from bigger banks, and all came with great relationship histories. And we have high hopes for their ability to help C1 Bank really infiltrate those relationship markets.

Okay. Thanks a lot.

(Operator Instructions) Jefferson Harralson, KBW.

I was just interested in the BOLI investment and how you think about BOLI versus the loans. Do you think it as more financially attractive, you are growing loans so fast -- I was just surprised by the BOLI investment? Or is it more of a timing issue where you wanted to put that cash to work, or is it a diversification thing?

The tax-affected yield is not so bad. It's pretty good, in fact, and at not too crazy a duration. A lot of BOLIs put on with very long durations, but we were able to get pretty good yield on tax-affected yield on a shorter-duration portfolio. So we think that, as this is an asset that you have for a long time obviously to help offset your costs within the business, it's a good additional tool to help leverage the equity. Okay. All right?

And also adding to what Trevor commented, the risk weighting is lower on the loans as well. That is separate from BOLI, so it looks through to the underlying securities on the portfolio, making it much lower as well.

Okay. All right. Excellent. And my follow-up -- on the SBA, it sort of sounds like you are expecting maybe $30 million to $50 million of origination. Is that annually? Is that sort of in the ballpark? And is there any specialties you are doing there, is it pretty eclectic SBA banks?

I think that's about the right range. Remember that SBA, we do both 504 and 7(a). And the 7(a) program is what you sell and get a premium for, and the 504 program is what you keep. But the SBA takes a second mortgage behind you, and you end up at about a 50% loan to value, so it's an excellent asset to have on the books.

So some of it -- some of our gains on sale of OREO really has to do with the mix of 504 versus 7(a). And we are focused on using the SBA program not just as a credit hedge but as a way to improve our risk-adjusted return on equity anywhere in the owner-occupied commercial real estate space. So many banks use the SBA truly as an adjunct credit as the way to reduce risk. We really -- anytime we are talking about owner-occupied property, we run it through and see if SBA can be a better outcome for that client.

Okay. And you may have said this, I just missed it. But what do you think a rough mix between 7(a) and 504 would be?

Very hard to predict. Very hard to predict.

Okay. A wide standard deviation of possible outcomes there?

Yes.

Okay. Thanks, guys.

What I would say, though, is that we -- if we don't earn it on the premiums, then we'll earn it on the net interest margin. So we are fairly agnostic as to which way it goes; both are very positive for the long term.

This concludes our question-and-answer session. I would like now to turn the conference back over to Mr. Trevor Burgess for any closing remarks.

I appreciate everyone joining us today. We are happy to take any follow-up questions that anyone has as always. And we are really focused on taking our pipeline and translating it. In the past two weeks, I have met with personally 25 different potential clients across our different markets. And the buzz, the energy, the enthusiasm that exists both for Florida and for our bank is palpable; I'm excited by it. And we've got a lot to do, and we are putting every effort into originating great new loans. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.