Bank of the Ozarks Chairman and CEO George Gleason told Wall Street analysts that the fast-growing Arkansas banking giant plans to continue expanding its profitable real estate specialties group and other key businesses, but will pull out of the small ticket leasing business and halt secondary mortgage lending to consumers.
Gleason outlined Bank of the Ozarks’ 2018 strategic initiatives during a conference call on Tuesday (Jan. 16) after the Little Rock banking group reported record fourth quarter and yearly earnings and pushed its fast-growing deposit and asset base beyond $17 billion and $21 billion, respectively.
During the 90-minute conference, Gleason laid our seven initiatives that the fast-growing, publicly traded financial concern will make over the next 12 months, saying the planning process undertaken by company executives has been “comprehensive and collaborative.”
“Our plan for 2018 de-emphasizes or eliminates activities that have not been highly-profitable and emphasizes activities that are becoming increasingly important and profitable to us,” said the veteran Arkansas banker.
A Bank of the Ozarks spokesperson did not respond to queries from Talk Business & Politics concerning the impact those strategic initiatives would have on the Little Rock bank’s workforce count, including the elimination of existing job functions at the end of 2017.
EXPANDING TECHNOLOGY TEAM, SERVICE TO MINORITY MARKETS
Gleason did say during the conference call that the Arkansas bank will expand its so-called OZRK labs team to 33 full-time employees, nearly double from 17 in 2016 and 25 in 2017. That team, based in St. Petersburg, Fla., is a financial technology laboratory within a bank. Gleason said as technology increasingly impacts more areas of its business, the Arkansas bank plans to invest more resources to that division.
“As we discussed previously, we are developing innovative technology-based solutions through our OZRK-Labs,” Gleason said. “We believe this is focus is critical in today’s rapidly evolving banking environment where technology … and artificial intelligence are becoming increasingly important in driving efficiencies and speed and quality of service.”
Gleason said the Arkansas bank also plans to make infrastructure upgrades in several other areas in 2018, including information technology and systems, auditing, compliance, cybersecurity, risk management and business reliance. That initiative, he said, will be coupled this year with a plan to expand the “human and physical infrastructure” to serve low- and moderate-income consumers in “majority minority markets.”
After completing several key acquisitions in Florida and the Southeast U.S. over the past several years, Bank of the Ozarks has expanded into key urban and rural markets where demographics include a large concentration of black and Hispanic consumers.
Last summer, the bank closed on its $800 million acquisition of Atlanta-based Community & Southern Holdings Inc. (C&S), its largest takeover to date and its 14th acquisition since March 2010. About the same time, the Arkansas bank also expanded its southern U.S. reach with the completion of its acquisition of St. Petersburg, Fla.-based C1 Financial in an all-stock transaction valued at $402.5 million.
“We consider these initiatives important in preparing for our future growth. We’ve made significant progress in 2017, and this progress should continue in 2018 – particularly in the first half of the (year) when we complete much of this infrastructure build,” Gleason said.
Turning to recent year-end restructuring initiatives, Gleason said the bank initiated a realignment of “certain functions” of its leasing division in late November and eliminated other leasing division jobs. As part of that realignment, the bank’s business aviation finance is now a standalone profit center within the community division. According to the company’s marketing materials, that business provides state-of-the-art financing for business aviation assets, ranging from ground-support equipment and flight simulators and turbo-props to helicopters and small and mid-cabin jet airplanes.
“This team saw good growth in 2017, and we think that growth will accelerate (in 2018) with the new team now in community banking,” Gleason said, adding that the aviation business accounted for one-third of the leasing division’s revenue.
$2.6 MILLION PAYOUT FOR BONUSES, $1.14 MILLION CHARGE FOR JOB CUTS
On the other hand, Gleason said the leasing division’s small ticket business, which provides lending solutions for small equipment dealers and manufacturers, has been unprofitable and shrinking in recent years.
“As a result, we ceased taking small-ticket applications in the leasing division on Nov. 28. The remaining portfolio of approximately $97 million will run off naturally with the last asset maturing in 2023,” he said.
The local banking executive also confirmed market speculation in Central and Northwest Arkansas that the state’s largest bank by assets had shuttered its secondary consumer mortgage lending business. The secondary mortgage market involves the buying and selling of mortgage-backed securities, which was largely blamed for the housing and subprime lending crisis that led to the Great Recession.
During the conference call, Gleason confirmed that Bank of the Ozarks had ceased taking new loan applications for secondary market consumer mortgage loans just a week before Christmas, saying that part of the bank’s mortgage lending operations operated essentially “at break-even” in 2017.
“And given the prospect for continued regulatory burden in the consumer mortgage area, it seemed unlikely to us that it would operate with meaningful — if any — profitability in the foreseeable future,” Gleason told banking analysts. “Since we’ve always sold our secondary market consumer mortgage loans shortly after origination, the elimination of this business will have no significant impact on our balance sheet.”
Gleason said the Arkansas bank expects revenue from the secondary market mortgage business will be mostly offset by a reduction in non-interest expenses as the remaining loans work their way through the company’s pipeline. Altogether, he said the bank incurred $1.14 million in severance and restructuring costs associated with the shutdown of the small ticket leasing and secondary consumer mortgage businesses. Company officials did not provide details of how many jobs, if any, were impacted.
Still, Gleason said the Little Rock banking giant plans to further diversify its non-purchase loan growth in 2018. In the previous year, the company’s high-growth Real Estate Specialties Group (RESG) accounted for 46% of the bank’s net growth in non-purchase loans, while all other loan origination teams accounted for the remaining 54%.
He said this reflects meaningful improvement in the contribution to growth from, indirect lending, corporate loan specialties and stabilized properties groups, and several teams within the community banking division, including teams handling consumer, small business, SBA, poultry, and business aviation loans.
“We expect increased growth collectively from these other divisions, groups, and teams in 2018,” Gleason said, adding that RESG will continue to be the bank’s largest growth engine and will continue to increase its volume of originations. “That trend was evident in 2017. Our fourth quarter RESG loan originations equaled our quarterly record of $2.56 billion. And our full-year 2017 RESG loan originations were an annual record $9.11 billion.”
In late December, Bank of the Ozarks announced that its board of directors had approved a cash-based incentive bonus plan for nearly 2,300 of the company’s current employees. Gleason said the GOP corporate tax cut legislation signed by President Donald Trump in December allowed the bank to provide the bonuses to its employees.
Under the terms of the plan, employees will be eligible to receive a cash award of up to $1,200 annually based on employee performance. Company officials said estimates indicate the annual pre-tax cost of the plan for 2018, including payroll taxes and other benefits, will be between $2.4 million and $2.7 million. Going forward, annual bonus payments under this plan will be determined and paid in the first quarter of each year.
According to the company’s fourth quarter results, the corporate tax cut from 35% to 21% resulted in an income tax benefit of $49.8 million. Although the company’s senior management was excluded from the new bonus plan, the Little Rock bank did increase its dividend earlier this month payable on Jan. 26 to all shareholders of record at the end of this week.