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Bank OZK’s Q4 was “strong end to challenging year”

Net income jumped 20% in final quarter; real estate lending arm reported rise in loan originations

Bank OZK CEO George Gleason (Photos via Bank OZK; iStock)
Bank OZK CEO George Gleason (Photos via Bank OZK; iStock)

One of the nation’s most active construction lenders ended 2020 on a high note following an overall miserable year for the real estate industry.

Bank OZK reported net income of $120.5 million in the fourth quarter, a 19.5 percent increase from the $100.8 million a year ago, marking its second highest quarterly profit in company history. The Arkansas-based bank also reported another quarter of almost no write-downs on its real estate loans.

It deferred a total of $1.1 billion in loans as of December, but about $980 million of those deferrals expired.

At its earnings call on Friday, bank executives said they are seeing fewer opportunities in New York City, the pandemic has led some residents to seek more space and less dense areas, including places in the south.

“It is hard to find things that make sense there [New York],” said CEO George Gleason. Though Bank OZK had been one of the largest construction lenders in New York, Miami and Los Angeles, following a down Q2, one executive said the company was “more on the cautious side in the more dense urban settings.

But the Q4 rise in net income is the second straight quarter of positive news following two quarters are massive losses. The bank said first half losses were caused by the sudden and severe economic downturn fueled by the coronavirus, and the implementation of a bank accounting method used to calculate Bank OZK’s allowance for credit losses.

For the full year, Bank OZK reported net income of $291.9 million, a 31.5 percent drop from the $425.9 million it reported in 2019, the company reported.

In the final quarter, Bank OZK — which has $27 billion in assets — increased its real estate loan originations. Its real estate lending arm, Real Estate Specialties Group, originated $1.77 billion in loans in Q4, a 23 percent rise from $1.44 billion in 2019. In comments accompanying the bank’s earnings release Thursday, Gleason called the fourth quarter a “strong finish to a challenging year.”

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The bank said payments on its real estate loans remained high from October through December.

On Friday’s call, the company highlighted one New York project that it said ran into trouble.

Bank OZK sold off a $50 million loan it provided to Reading International in early 2017 for a project to expand the 70,000-square-foot Union Square Theatre in Manhattan. According to a recent filing Reading made with the Securities and Exchange Commission, the borrower drew down $40.8 million of the loan. Bank OZK had extended the maturity of the loan and increased the interest rate to 17.5 percent.

“It was a transaction that we were just not pleased with the progress on,” Gleason said during the call with analysts. He said the bank didn’t lose any money on the loan. “We didn’t leave a penny on the table.”

Brannon Hamblen, chief operating officer and head of its real estate lending arm, said the bank has recently provided loans to life sciences projects, and is seeing more opportunities in multifamily across the country; he mentioned that strategy earlier in the year as well.

Hamblen said multifamily “has probably the highest number of developments and, in addition, competition pursuing those developments.” He added, “We are probably going to continue to see strong origination there, but we are being careful to make sure it’s at the right time to the right place to the right people.”

Bank OZK, formerly known as Bank of the Ozarks, is known for underwriting large construction loans to condo projects. It has come under scrutiny from short sellers and some banking experts who say it is taking on too much risk. Bank OZK also shed its holding company, which allowed it to stop filing quarterly and annual reports with the SEC, and removed its oversight by the Federal Reserve.

The bank has long claimed it only works with the best sponsors at low leverage points. It also says it is the sole-secured lender on its projects, meaning if something goes wrong Bank OZK is the first to get paid back.

Bank OZK’s stock rose nearly 5 percent to $35.96 at the closing bell on Friday.

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