Good day, and thank you for standing by. Welcome to Bank OZK First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead.

Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. 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. 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. Joining me on the call to take your questions are George Gleason, Chairman and CEO; Brannon Hamblen, President; Tim Hicks, Chief Financial Officer; Cindy Wolfe, Chief Operating Officer; and Jake Munn, President, Corporate and Institutional Banking. We'll now open up the lines for your questions. Let me now ask our operator, Michelle, to remind our listeners how to queue in for questions.

Our first question will come from Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.

Yes, good morning, everyone. Thanks for the time.

Good morning.

I guess I know you guys said in the management comments, it's kind of hard to update guidance around our ESG originations and I appreciate that given all the uncertainty. But can you give us maybe some anecdotal discussion about what your customers are thinking, how they've been reacting over the past couple of weeks and what you think customer demand, how that's changed maybe in the near-term and how you're thinking about walking through that demand profile in the future?

Brannon, do you want to take that one?

Absolutely. Stephen, thanks for the question. You read the comments correctly. It's an uncertain time right now, but let me give you some background. I've been talking to a number of market participants looking at the industry from different angles. The environment was such that equity was already having to work really hard to pencil deals. Sponsors were having to work hard to find their common equity or their preferred equity. Coming into the beginning of Q1, there was a hopefulness about direction and a lot of equity that had been on the sidelines for a while. So as we look forward into the year, we were expecting that we could outperform 2024 by some margin. Everyone is aware of the uncertainty that's been introduced into the market over the last several weeks. That's added another element, another consideration. However, the sentiment has been that this is just another form of short-term uncertainty, and that long-term, things will work out. We don't know where short-term stops and long-term starts, but there is a level of confidence that doing real estate deals will make sense. The uncertainty around that timing has caused us to pause our guidance related to that. We come into this quarter with a decent closing pipeline, but there’s enough uncertainty that we didn't feel we could stand on solid ground to give additional guidance. Our sponsors are all pushing to consider the potential impact of tariffs and how their general contracts are written, including who will cover additional costs if they occur. There are those that believe this is just a mathematical problem—not necessarily a deal killer. So everyone is focused on the good deals that are out there and ensuring proper underwriting and structuring in light of uncertainty. While deals will still be originated, it's difficult to predict the volume over the remainder of the year.

And Stephen, you were focused on RESG volume. I would point out that we reiterated our prior guidance for mid-single-digit to high-single-digit total loan growth for the year. Our first quarter was strong with a 3.8% growth, not annualized in Q1. While we did pull down the RESG origination volume, we still think our cautious guidance at the beginning of the year was appropriate and still stands.

Yes, no, 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 looks like last four quarters, 65% of the loan growth has actually come from non-RESG loans, which is pretty impressive and that handoff story continues to play out well ahead of what I would have thought. It's great to see. But I guess my question there is, with this uncertainty, maybe with the tariffs, does it make you think any differently about the pace and aggressiveness with which you would go after those loans in those new verticals versus RESG, which has traditionally been your bread-and-butter?

Yes, that's a great question. The Corporate and Institutional Banking Group that 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 recent quarters. I'll let Jake answer that question. Jake?

Yes, I appreciate that, George. Good morning, Steve, and good question there. We had a strong quarter for CIB in Q1, where ABLG led from a total dollars deployed standpoint, and CBSF led from a new relationship count standpoint. First quarter for diversified C&I lending is typically the weakest. However, second and fourth quarters are more active, while the third quarter is usually the strongest. We still feel good about the momentum we're gaining in CIB as a whole. It's part of our continued growth and diversification strategy. Given the macroeconomic noise and headwinds mentioned, we're conservatively looking at this on a quarter-by-quarter basis. But our three legacy business lines, ABLG, EFCS, and Fund Finance, have strong pipelines and continue adding new deals steadily. Additionally, our Corporate Banking and Sponsor Finance business line, launched a few quarters ago, is still in expansion mode, and we're looking to place two additional teams in major metropolitan areas to drive growth. We're also actively pursuing the establishment of a natural resources group this year and have identified an Executive Managing Director for this group.

And Stephen, I would add that implicit in the reaffirmation of our aggregate loan growth guidance for the year is the growing confidence and expectation we have for other business lines to pick up the pace, as needed, to offset any reduction in RESG origination volume. So we're feeling good about it.

That's fantastic. Thanks for all the time and the color. Appreciate it. It’s always a great start to the year.

Thank you.

Thank you. 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.

You noted it's an uncertain time, and I guess my question is, if this uncertainty remains and businesses are slow to make decisions, how are you thinking about the pace 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?

Brannon, you want to take that one?

Absolutely. I'll speak about the last part of that question, Manan. You guys have seen in our comments for several quarters 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 over the 450 modifications and extensions that we've made. Yes, we are constantly having those conversations, and we're pleased with the level at which they continue to provide support. With respect to leasing activity and business decisions, we are seeing continued lease-up across the portfolio. Based on the facts as we've seen them so far, there are certainly some elongated lease-up periods, but we continue to see healthy lease-up in the portfolio. We monitor this continuously, and as it occurs or extends, we expect to continue to see our sponsors support these projects that are the newest and highest-quality projects in the market. Our experience has shown that the highest-quality, best-located projects still obtain the majority of the leasing that occurs in the market. So the story today is similar to how it was before, despite the additional noise in the market.

Got it. Very helpful. And maybe just to pivot over to NII. NII was relatively flat Q-on-Q despite, I think the average fed funds rate was down meaningfully. Can you talk about what drove that? And I see the new disclosure on securities repayments in 2025. Can you talk about what reinvestment rates you're getting there? And maybe also speak to the duration that you're putting on the securities book? We've noticed it's been increasing a little bit over the past couple of quarters.

Let me take the securities question, and then I'll let Tim provide some commentary on the net interest income question. In our management comments, we noted that this was the first quarter among many where we actually had some growth in the bond book. With a very optimistic view of the economy early in the quarter, and the steepening of the yield curve, the medium term, short-term 15-year agency mortgage-backed products that we buy a lot of, and some medium-dated muni bonds matched our buying strategy. We bought about $320 million in bonds when the 10-year treasury backed up into the $468 million to $478 million range. We were particular and careful in our purchases, however, we have moved away from that range as the yields changed. The bonds that we added had a very nice yield on them, but we are being selective with future purchases given the current rates. We've got some lower-rate bonds rolling off, and we've provided detail on that in Figure 4 on page six of the management comments. It’s not a huge volume, but it's about 13% of the portfolio rolling off this year and another 15% rolling off next year. We expect to reinvest these at improved rates within the 5% to 7% tax-equivalent yield range, consistent with our prior experience. Tim, you want to comment on the net interest income generally, including the impact of having two fewer days in Q1 compared to Q4?

Yes, that's right, George. We had two fewer days in Q1, and our NIM was down two basis points, but the results were good. We gave you guidance on page eight under Figure 7 concerning our net interest margin, and where we believe it should go under different rate scenarios. During Q1, we had a robust quarter, as George mentioned earlier, with strong loan growth. We believe we'll have continued growth in average earning assets throughout the year, which we expect to drive record net interest income in at least one or more quarters and for the full year. Our team did a great job lowering our COIBD during the quarter, down 29 basis points, which is likely one of the best in the industry. We still have several quarters of volume from time deposit maturities with weighted average rates in the mid-4% range. We feel that we can continue to decrease our COIBD, and we're pleased with our NII results for the quarter and think it positions us well for the rest of the year. Cindy, do you want to provide color on how we finished the quarter and on deposit costs, which is a significant element of net interest income?

Sure. I'm happy to do that. A little color on March. We're extremely pleased and proud, as Tim said, of the 29 basis point decrease in the quarter. In March alone, we picked up 90 basis points of savings, retaining 88% of our maturing CDs. We cut another 10 basis points in April on our published CD specials. Going forward, there's significant excitement, and I have to highlight that we've grown deposits even while achieving these cost reductions amidst extraordinarily challenging deposit growth conditions.

The 90 basis points we picked up in March was the weighted-average rate on time deposits rolling versus the weighted-average rate on those rolling off.

That's right. Yes. Thank you.

Our net interest margin, or our cost of interest-bearing deposits for March was 371, so 7 basis points below the quarterly average. We are diligently working to lower those costs and our team has been effective at doing it.

I think you mentioned last time that one or two cuts could be slightly negative to NIM because loan yields would decrease faster. Beyond that, do the floors protect you on the loan side? Is it still something you guys see happening? More cuts allowing for NIM to be further supported?

Yes, and we mentioned this in the language as Tim pointed out, where we noted that if the Fed reduces interest rates, we anticipate loan yields will decrease faster than our deposit costs, likely resulting in some decrease in our net interest margin until time deposits reprice and floor rates are reached on more variable-rate loans. We refer you to Figure 22, showing variable-rate loans hitting their floor with each decrease in the Fed funds target rate and other similar market rates. So when we get down to three decreases, you're getting one decrease, and we don't get a lot more. We see that happening.

Great. Thank you.

Our next question comes from Tim Mitchell with Raymond James. Your line is open. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions. I want to start on the buybacks subsequent to quarter-end, which was great to see. With stock still trading around those levels, any color you can give on your attitude amid the uncertainty out there? You still have a lot remaining under your program. Just curious if you could provide any thoughts.

Tim, do you want to take that?

Yes. If we continue to trade at current levels, we would expect to continue buying back throughout the quarter. Our current authorization is expiring at the end of the quarter, but we expect our Board to consider new authorizations before that time. At current levels, we would buy more.

Got it. And then on expenses, if loan growth was more muted than you expected, I know it sounds like you're confident about your outlook. Just your thoughts on weighing near-term EPS versus continuing to invest in branches and new people.

We're very focused on capitalizing on opportunities in the market. You've seen that with our bond purchases early in the quarter, stock repurchases after quarter-end, and our deposit teams being strategic in managing our deposit base to achieve a significant reduction in our cost of interest-bearing deposits. We will continue to add team members to grow in areas mentioned earlier. We're growing, which reflects the 10% growth in our non-interest expense in the quarter, which is consistent with our guidance. That's our approach.

Sure. We're excited about opening new branches. This year alone, we plan to open about 34 branches, with timing depending on construction schedules. By the end of the year, we expect to have around 30 more branches than we had at the beginning of the year, which will take time to grow our deposits.

That is consistent with our 10% year-over-year guidance for growth in non-interest expense. We've accounted for that branch addition and staffing in our projections.

Got it. Thanks for all the color. Thanks for taking my questions.

Thank you.

Our next question is from the line of Jordan Ghent with Stephens Inc. Your line is open. Please go ahead.

Hey, good morning. I just wanted to ask about RESG and your target mix moving forward. Last time, you mentioned aiming for upper 50% by the end of '25 and into early '26. Is that still a target we can expect?

I think you'll see a continuation of the trend we've seen over the recent quarters, where RESG's percentage of our total book comes down and CIB and our community banking parts of our book, along with indirect lending, goes up. While I won't reaffirm specifics without having updated numbers in front of me, that trend is evident. RESG will become a lower percentage of our book, but it will be a larger dollar value moving forward. We're fully committed to that business, but other units will continue to outgrow it in most quarters going forward.

Perfect. And then I noticed there was the Maryland land loan that was moved to substandard accrual. The LTV on it was pretty healthy and low at 51%, especially compared to the other substandard accruals. Can you give any color on why it was moved?

Yes. It is substandard accrual. Brannon, you want to take that question?

Sure. That assessment is based on the 2024 appraisal. While the LTV is healthy, it is a complicated land development loan that comes with certain risks. We’re engaging in positive discussions with the sponsor, and we think we took the appropriate approach given the complexity and approaching maturity.

Most of our land loans in our RESG portfolio are land bridge loans intended for near-term vertical development. There are a few loans that are more land development types, like this Maryland loan, which is one of the fewer that fall into that category. We believe this assessment is appropriate given the nature of the discussions and the impending maturity.

Thanks for the updated discussions. On the Chicago land loan, any update on the marketing of that property? Are you planning to be more aggressive going forward?

This is a significant asset. The City of Chicago is very interested in the outcome of this development as it holds significant potential. We'll be patient in finding the right sponsor who has the capital and expertise for its development. We've had several parties express serious interest already. The value of this land has generated considerable attention, and we'll take the time needed to negotiate effectively.

Thanks for answering my questions.

Our next question is from the line of Samuel Varga with UBS. Your line is open. Please go ahead.

Hey, good morning.

Good morning, Sam.

I wanted to touch upon how the macro-environment is impacting originations. Can you discuss the pace of repayments? Does the volatility speed up repayments at all?

Yes, happy to. This past quarter, we saw a drop-off in repayment volume compared to past quarters, but I wouldn't take that as indicative of the repayment trend. There is some impact from macroeconomic noise and uncertainty, but we still expect repayments will return to a level similar to the late part of '24, which should result in elevated repayments for the year.

Brannon, I think already in the first two weeks of April, we've seen six RESG loans payoff, totaling $250 million to $300 million. Most of these were expected to pay off in Q1, but the closings just took a few more weeks than anticipated.

That's correct. Five of those six paid off in the first three days of the month. Point well made.

Thanks for all the color. And regarding buybacks, are the capital ratios being kept flat with expectations on how you manage CET1 through buybacks?

Yes, that's correct. Our CET1 ratios have been relatively flat, but we would be willing to let CET1 decrease slightly when there are compelling values like today. We believe our patience with share repurchase authorization is paying off, and we can utilize opportunities to buy back shares effectively.

Great. Thank you very much for taking my questions.

Our next question comes from Timur Braziler with Wells Fargo. Your line is open. Please go ahead.

Hi, good morning.

Good morning.

I wanted to circle back on the Chicago exposure and the relationship with Sterling Bay. Given the complexity of land development, how are you thinking about the other loans you have with Sterling Bay in addition to those in Lincoln Yards?

Brannon, you want to take that?

Sure, Timur. Each of those loans is unique; we've structured them considering different project types, leasing activities, and capital involvement. It's not our practice to broad-brush a situation like this across similar sponsorship names.

Thanks. Regarding the remaining loans in Lincoln Yards, how are you viewing the development considering the city's involvement?

There’s significant potential in this asset, and the city's engagement is seen as positive. A strong developer with the capability to navigate the city's requirements will be essential, and this collaboration is necessary for the project's success.

Thank you. Just one follow-up on the growth and diversification strategy. Do your growth rates still make sense amid the current uncertainty?

We believe our growth and diversification strategy remains right. Our team is experienced and committed to preserving asset quality. This strategy should contribute positively to both company health and stock performance.

A fair question—our pursuits in CIB are centered on good opportunities. We're carefully monitoring macroeconomic factors and ensuring the companies we lend to are well-established and resilient. To mitigate risks, we do not engage in leveraged lending, favoring enterprise value lending.

Great. Thank you.

Our last question comes from the line of Brian Martin with Janney. Your line is open. Please go ahead.

Hey, good morning, guys.

Good morning, Brian.

If we could touch on the current reserves and outlook given the volatility? Any considerations for increasing reserves based on recent developments?

There has been a progressive array of risks we've been addressing, and we've built our ACL conservatively to cover potential challenges. We've seen our customers perform well despite these risks, and we remain committed to adjusting as necessary. The build of our ACL this quarter reflects this commitment.

During the previous quarter, we shifted our weightings toward more downside scenarios, anticipating various economic developments. We will continue to carefully assess these in our calculations.

Thank you for your answers.

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.

Thank you all for joining us today. We appreciate the questions and your interest in Bank OZK. We look forward to speaking with you in about 90 days.

This concludes today's conference call. Thank you for participating. You may now disconnect, everyone.