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Bank OZK (OZK) Q3 Earnings Miss on Higher Costs & Provision

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Bank OZK’s OZK third-quarter 2018 earnings per share of 58 cents missed the Zacks Consensus Estimate of 90 cents. The figure represents a year-over-year decline of 22.7%. Notably, results in the reported quarter included pre-tax expenses of $10.8 million related to the strategic rebranding effort.

Results primarily benefited from an improvement in net interest income. Also, loans and deposit balances depicted an improvement, supporting results to some extent. However, elevated expenses, lower non-interest income and higher provisions were the undermining factors.

Net income available to common shareholders was $74.2 million, down 22.7% from the year-ago quarter.

Revenues Improve, Costs Surge

Net revenues came in at $244.7 million, up nearly 1% year over year. However, the top line missed the Zacks Consensus Estimate of $258.1 million.  

Net interest income grew 5.2% year over year to $220.6 million. However, net interest margin, on a fully-taxable equivalent basis, fell 37 basis points (bps) to 4.47%.

Non-interest income totaled $24.1 million, down 26.3% from the year-ago quarter. The fall mainly reflected the company’s exit from mortgage-lending operation.

Non-interest expenses were $102.9 million, up 22% year over year. The upsurge resulted from a rise in all expense components.

Bank OZK’s efficiency ratio was 41.87% compared with 34.88% in the prior-year quarter. A fall in efficiency ratio indicates higher profitability.

Rise in Loans & Deposits

As of Sep 30, 2018, total loans were $16.73 billion, up 6% from the year-ago quarter and total deposits grew 5.9% from the prior-year quarter end to $17.82 billion.

Furthermore, the company had total assets of $22.09 billion and shareholders’ equity was $3.65 billion, as of the same date.

Credit Quality Worsens

During the reported quarter, Bank OZK incurred combined net charge-offs (NCOs) of $45.5 million on two Real Estate Specialties Group credits, which had been in its portfolio over more than a decade. Notably, these were previously classified as substandard. This was the primary reason for deterioration of the company’s asset quality.

The ratio of non-performing loans, as a percentage of total loans, increased 12 bps year over year to 0.23% as of Sep 30, 2018. Additionally, annualized NCO ratio to average total loans rose 105 bps year over year to 1.14%.

Also, provision for loan and lease losses jumped significantly from the year-earlier quarter to $41.9 million.

Profitability Ratios Deteriorate

At the end of the reported quarter, return on average assets was 1.33%, down from 1.89% in the year-ago quarter. Also, return on average common equity declined to 8.07% from 11.56% a year ago.    

Our Take

Bank OZK remains well positioned for organic growth, given continued improvement in loans and deposit balances. However, persistently rising expenses, due to the bank’s expansion strategy through de novo branching, might dent bottom-line growth in the quarters ahead. Also, its declining net interest margin remains another huge concern.

Bank OZK Price, Consensus and EPS Surprise

 

Bank OZK Price, Consensus and EPS Surprise | Bank OZK Quote

Bank OZK currently has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

BancorpSouth BXS reported third-quarter 2018 net operating earnings of 56 cents per share, in line with the Zacks Consensus Estimate. The results benefited from an improvement in net interest revenues and non-interest sales, partially muted by higher expenses.

Hancock Whitney Corporation’s HWC third-quarter 2018 adjusted earnings per share of $1.01 were in line with the Zacks Consensus Estimate. The results benefited from an improvement in net revenues and a decline in provision for loan losses. However, an increase in expenses and lower net interest margin were the downsides.

First Horizon National Corporation FHN reported third-quarter 2018 adjusted earnings per share of 36 cents, in line with the Zacks Consensus Estimate. Revenues improved on a year-over-year basis, supported by an expanded net interest margin. However, a substantial rise in expenses and weakening of capital position were the key undermining factors.

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