Bank OZK, which has been behind some of the largest condo loans in New York and Miami, reported a drop in fourth-quarter net income and reported the rating on one of its loans had been downgraded. The Arkansas-based bank’s stock fell 5 percent shortly after news of its earnings was released Friday morning.
Bank OZK’s earnings are closely watched since they are viewed as an indicator of the condo market and the demand for large-scale construction loans.
The bank’s net income declined in the last three months of the year compared to the previous year. It reported a 12.4 percent drop, to $100.8 million from $115 million over the same period in 2018. Diluted earnings per common share fell 12.4 percent to 78 cents.
The bank attributed some of the decline due to “the large volume of loan repayments of non-purchased loans, the pay-downs in our purchased loan portfolio,” as well as a “competitive environment for loans and deposits.”
The company’s loan originations in its real estate lending division, RESG, increased to $1.44 billion in the fourth quarter, up from $1.08 billion in 2018. But its overall real estate lending is still down significantly from two years ago when it totaled $2.56 billion in the fourth quarter of 2017.
The drop in the past two years could signal the growing competition from debt funds in construction lending, as well as the weakening demand for new ground-up luxury condo developments in New York and Miami.
“Our focus has been, and will continue to be, on maintaining our credit quality and return standards, even if maintaining those standards adversely affects our origination volume and non-purchased loan growth,” the company said in management comments following its earnings release.
The earnings also revealed that one of the bank’s loans had been downgraded from “watch” to substandard, which means that the bank has a greater chance of taking a loss on it. The loan was for $55.7 million, and the bank first reported the issues with it in 2018. The loan originated over a decade ago.
“This downgrade was primarily due to several sales which had been expected to close in late 2019 being canceled or delayed, as well as a lower than expected volume of pending lot sales going into 2020,” according to a company’s management comments.
Bank OZK, under the leadership of its CEO George Gleason, rose to become one of the most active condo construction lenders in the country. The bank’s real estate lending strategy is based around lending to high-quality developers as the sole secured lender at low leverage points.
In 2018, the bank provided the largest condo construction loan in Miami-Dade County history, a $558 million loan to the Trump Group for its Estates at Acqualina condo project in Sunny Isles Beach, Florida. In October, Bank OZK provided a $664 million loan to a mixed-use project in Tampa.