George Gleason has a simple and concise message for Bank OZK investors: Be patient.
Gleason, Bank OZK's chairman and CEO, acknowledged during an earnings call Friday that there will be short-term pain in 2020 as the Little Rock, Ark., bank weathers a wave of payoffs and makes a number of internal investments. At the same time, he said perseverance will pay off over the next few years.
“We’ll be in a good position to grow,” Gleason said during the call. "I’m asking shareholders to be patient and think long-term. ... If we can do that, I think we’ll get a nice payoff.”
The $23.6 billion-asset bank's fourth-quarter profit fell 12% from a year earlier, to $100.8 million.
Loan repayments in the bank's Real Estate Specialties Group, which accounts for about 55% of its $17.4 billion loan portfolio, hit a record $1.66 billion in the fourth quarter, outpacing originations by $160 million.
Bank OZK knew it faced a high level of payoffs. Most of its RESG credits are construction and development loans with an average lifespan of two to four years, and 2016 and 2017 were record years for the unit with a total of $17.3 billion in originations.
Lower interest rates and increasingly fierce competition have posed bigger problems, making it much tougher for Bank OZK to book enough loans to replace what it lost.
“Our hope was we’d be able to continue finding enough business to outrun that payoff wave,” Gleason said. Instead, Bank OZK is projecting another relatively slow-growth year in 2020, with loan growth coming in below the 7.6% it had in 2019.
Bank OZK, which has boasted about its underwriting standards for years, is unwilling to compromise this year to bring in more loans, Gleason said.
“We’re seeing a lot of lenders get very aggressive on rates and credit," he said. "We’re willing to give some on rates, but we’re non-negotiable on credit.”
Overall credit metrics looked good, with nonperforming assets totaling just 0.18% of total assets. Net charge-offs in the fourth quarter were equal to 0.11% of total loans and there were no RESG charge-offs.
Analysts, however, focused on Bank OZK’s decision to move a $57.5 million RESG credit from its watchlist to substandard status. Gleason said the project, a townhouse development on Lake Tahoe, is still in a position to make payments, so Bank OZK isn’t projecting any losses for now.
The loan is a revolving credit, and Bank OZK is continuing to advance funds so the borrower can keep developing the property. “Townhouses are selling, lots are selling, it’s a very viable project,” Gleason said.
Substandard loans total just 2.7% of tangible risk-based capital, including the townhouse development, Brian Martin, an analyst at Janney Montgomery Scott, wrote in his client note.
Despite Gleason’s optimism, Stephen Scouten, an analyst at Piper Sandler, said in a Friday note to clients that the downgrade would likely renew fears that surfaced in October 2018, when the company
Scouten, who isn’t forecasting any losses at the moment, noted that the bank could withstand a substantial charge-off tied to the relationship.
“Even if OZK took a 25% haircut on the credit, it would only create an" 8-cents-a-share hit to earnings, Scouten wrote.
