Bank Of The Ozarks Inc (NASDAQ:OZRK) Q4 2019 Earnings Conference Call - Final Transcript
Jan 17, 2020 • 11:00 am ET
[Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley. Your line is now open.
Great, thanks, good morning. I guess maybe you can start off in terms of that substandard credit that was formerly watchlist. Do you just have a size, the potential losses on that and also the timing of any potential resolution around that? Thanks.
Good question, Ken. Thank you. We do not have any thoughts on what a loss might be. Obviously, the loan is still performing as an accruing loan, the fact that it's a performing accruing loan is a result of our analysis that projects our future cash flows, interest, principal, payments and so forth on the loan. And while the margins are very thin, we currently project that there will be enough cash flow from the project to repay all of the principal and all of the interest on our loan and of course, we're projecting interest into the future on that using a forward yield curve as a proxy for what interest rates will be in the future.
So based on that there is no present loss in it now. If you look at the appraised value in our bubble chart and our management comments, it is more than 100% loan to value, but obviously the appraisal uses a higher discount rate then the effective rate on our loan. So if you use the effective rate on our loan on a forward yield curve there is no present loss exposure. What would cause there to be loss exposure and would causes credit to move from substandard accruing [Phonetic] to a non-accrual status, would be a change in sales process projected sales velocity interest rates that in some combination of those calls that forward projection of net present value to become negative instead of positive differential over the loan amount. So it's certainly sensors, no present evidence that the loan is impaired, it's premature to talk about what the loss would be.
The timing for resolution, your other question. I think this loan will be with us quite a while. The sponsors are working the project very effectively. And while their fourth quarter sales and signing of sales contracts were a little bit below what we would have hoped for which cause the -- are contributed to the downgrade. The reality is they're still selling townhomes and selling lots, they're still starting new townhomes and working toward development of additional small phase of lots. So I think the expectation we have with us can be a long-term deal and they're going to continue to work it hopefully successfully. And hopefully their sales process and sales velocities will be stable to improving and that will lead the profile of this credit to improve if their sales velocity and sales prices decline that will leave the profile of those credit to decline. So that's about all I can say about it.
Got you. But I guess, in the release you talked