Bank OZK 3Q financial results below Wall Street views, mall-related charge-offs cut profits

Third quarter results for the Arkansas bank formerly known as Bank of the Ozarks fell well short of Wall Street expectations as the regional banking group incurred charge-offs at commercial properties attached to troubled J.C. Penney and Sears locations, the company said Thursday (Oct. 10).

For the period ended Sept. 30, Bank OZK of Little Rock reported third-quarter earnings of nearly $74.2 million, or 58 cents per share, down 22.7% from year-ago results of $96 million, or 75 cents per share in the same period of 2017.

In management comments explaining the disappointing quarterly results, Bank OZK officials noted “significant unusual items” within the company’s Real Estate Specialties Group (RSEG) portfolio, including two unrelated projects in South Carolina and North Carolina that incurred a total debt of $45.5 million.

According to the company’s explainer, the South Carolina credit was originated in 2007, a time when RESG was originating a higher proportion of its loans on stabilized and transitional properties, including a regional mall that suffered from both declining property performance and high-interest rates. Company officials said the project’s debt service coverage ratio fell below the bank’s benchmark as the project was negatively impacted by uncertainty related to Sears and J.C. Penney anchor tenants.

In North Carolina, the bank’s credit originated in 2008 on a secured multi-phase land, residential lot and home project. To enhance the development, Bank OZK said the borrower modified its business plan in recent years to include significant vertical construction of its residential homes for sale portfolio since 2007 and 2008, respectively.

“However, the newly built homes and the lots owned by our borrower have not sold well recently, with sales seeming to have been undercut by cheaper pricing on existing homes and lots which have come to market as the sentiment around the project has improved,” management comments noted. “The lack of sales by our borrower during the recent prime summer selling season resulted in this credit becoming past due in the quarter just ended.”

Bank OZK has not disclosed how much of its RSEG portfolio is tied to aging mall locations anchored by Sears and J.C. Penney stores. Earlier this week, Sears filed for bankruptcy protection and announced plans to close 142 additional stores. Rival J.C. Penney has also shuttered more than 130 mall locations over the last 18 months as the ailing brick-and-mortar retailer seeks to stay afloat.

GLEASON: QUARTERLY RESULTS ‘SUBSTANDARD,’ 
Longtime Bank OZK Chairman and CEO George Gleason, who has staunchly defended the bank’s investment in the commercial real estate space, said the company’s disappointing third quarter financial results were due to the “substandard” Carolina mall investments.

“While our third quarter results did not meet our usual high standards for performance, we are very pleased with the continued enhancement of our team, technology and business capabilities. RESG continues to be a national leader in commercial real estate finance. Our indirect RV and Marine lending business continue to grow as another exceptional national lending platform.”

Gleason continued: “Many of the businesses in our community bank group are successfully growing, with the expectation that some of these units may ultimately achieve national scale. Our focus is solidly on our future, and we believe we are prepared to accomplish more than ever before.”

Along those lines, Bank OZK also noted that the company’s recent name change and rebranding efforts led to pretax expenses of $10.8 million during the third quarter and $11.4 million for the first nine months of the year. In July, the Little Rock bank changed its name to “Bank OZK,” adopted the “OZK” ticker symbol, and adopted a new logo and signage as part of the company’s strategic rebranding as one of the nation’s fastest growing regional banks.

To coordinate that growth, the Little Rock bank began construction in late 2017 on the company’s new 247,000-square foot headquarters at a 44-acre site on State Highway 10 in west Little Rock. Some 500 employees are expected to move into the building when construction is completed in late 2019 or early 2020, with a capacity to accommodate 800 to 900 employees, officials said.

The companywide rebranding, new Little Rock headquarters and other executive and administrative changes are preparing the Arkansas bank for the next step in its maturation following a long period of key acquisitions across the Southeast U.S., along with commercial loan offices in New York and California.

Despite the aforementioned RESG investments, Bank OZK officials attempted to assuage Wall Street concerns by highlighting the fact that the bank’s net charge-off ratio was at or below the industry average and the company’s balance sheet was still outperforming industry peers.

“In our 21 years as a public company, our net charge-off ratio for non-purchased loans has averaged about 37% of the industry’s net charge-off ratio,” bank officials said. “Given our expectations for excellent net charge-off ratios in the fourth quarter of 2018, we expect our full year results for 2018 to once again outperform the industry.”

Still, the surprising real estate charge-offs led to some concerns on Wall Street as the company’s stock was down nearly 20% in after hours trading in Thursday’s session on the Nasdaq Stock Exchange. Officially, Bank OZK closed at $34.85, down $1.58 or 4.3%. Trading after market close pushed the company’s stock down further by $7.10 to $27.75.

Wall Street analysts had forecasted the Arkansas regional banking group to report third-quarter earnings of 90 cents per share on revenue of $258 million, according to Thomson Reuters. However, Bank OZK’s real estate charge-offs of 58 cents cut quarterly profits from a year ago nearly in half.

At the end of the company’s 37-page appendix to the third quarter financial statement, company officials said Bank OZK’s board of directors regularly monitors the capital position and took a second look at the August board meeting.

“The board concluded that our current capital position, while robust, is appropriate in light of our expectations for continued long-term growth,” officials said.

Overall, Bank OZK saw near-across the board improvements among its key financial metrics. Total loans, including purchased loans, were $16.7 billion for the three-month period, a 6% increase from $15.8 billion in the same period of 2017. Non-purchased loans, which exclude loans acquired in previous acquisitions, were $14.4 billion for the quarter, a 19.2% increase from $12 billion a year ago.

Through Sept. 30, Bank OZK deposits grew to $17.8 billion at the close of the third quarter, a 5.9% increase from $16.8 billion a year ago. Total assets jumped 10.1% to $22.2 billion compared to $20.7 billion in the same period of 2017.

Net interest income for the third quarter was $220.6 million, a 5.2% increase from $209.7 million for the third quarter of 2017. However, it was slightly below the record $224.7 million tally that the Arkansas bank reached in the previous quarter. Non-interest income for the third quarter, however, decreased 26.3% to $24.1 million compared to $32.7 million a year ago.

Common stockholders’ equity was $3.65 billion at Sept. 30, 2018, a 9.6% increase from $3.33 billion in the third quarter of 2017. Tangible common stockholders’ equity was $2.95 billion for the quarter, a 12.6% increase from $2.62 billion a year ago.

As of Thursday, Bank OZK has more than 250 banking offices in Arkansas, Georgia, Florida, North Carolina, Texas, Alabama, South Carolina, California, New York and Mississippi.