Bank of the Ozarks: Don't feed the alligators
For a bank, achieving record profits requires delicate balance: one slip and into the swamp of defaults, bankruptcies and frozen credit you go. Tiptoeing past the morass is Bank of the Ozarks (Nasdaq:OZRK), which just posted new highs in net income and earnings per share.
Headquartered in Little Rock, Ark., Bank of the Ozarks reported record net income of $9 million in the third quarter through September, up 7.2% from the previous year. Earnings per share were a record $0.53, up 6%. Dividends for the bank, with market capitalization of $479 million, yield 1.8%.
Standout results, to be sure. But Bank of the Ozarks still needs to step carefully: real estate development and construction loans pose a risk, as they do for many regional banks. Pushed out of the residential mortgage market by other lenders, these banks turned to commercial real estate loans in recent years. As yet, write-downs of commercial real estate construction loans haven’t come close to matching what remains on the books. These loans also are not targeted by the $700 billion bank bailout, which is aimed at relieving those who meddled in faulty mortgage loans and tangled derivative trades.
To some investors, construction loans are the next unmortared block waiting to fall onto the economy. Bank of the Ozarks has loans and leases of $2.06 billion, up 13.2% from a year ago, and these include a lot of construction and development loans. At the end of December, real estate loans were 82% of total loans and leases, and construction and development loans -- a subset of release estate loans -- were 37% of the total loan and lease portfolio.
Of note is Texas, where the company continued to add to loans in the third quarter, bringing these to 27% of its loan portfolio at the end of September. Bank of the Ozarks, though, was not active in adding loans in 2007, when the company would not match aggressive credit terms offered by others. Similar to moves by many banks, Bank of the Ozarks increased its allowance for loan and lease losses to $3.4 million in the third quarter, triple the allowance a year ago. Net charge-offs in the third quarter were $1.4 million.
Standard and Poors has a negative outlook for regional banks, projecting that “loan loss provisioning expenses will be relatively high for the rest of this year, and possibly much of next year as well.” S&P also notes that declining credit quality of regional banks’ loan portfolios results in the need to raise additional capital.
Bank of the Ozarks nonperforming loans and leases as a percent of total were 0.70% as of Sept. 30, up from 0.19% the previous year. Nonperforming assets as a percent of total increased to 0.66% as of Sept. 30, three times the level of a year ago.
The company has operations in 65 offices in northern, western and central Arkansas. It also has five Texas banking offices and loan production offices in Charlotte, N.C. and Little Rock, Ark. On Dec.31, total assets were $2.71 billion, total loans and leases were $1.87 billion and total deposits were $2.06 billion. Net interest income for 2007 was $77.6 million, net income was $31.7 million and diluted earnings per share were $1.89.
The bank’s profits have been padded by increases in net interest income from favorable margins. Net interest income, which accounts for 83% of total revenue, rose 25.1% in the third quarter from the previous year and 22.3% in the nine months through September.
Shares closed Wednesday at $28.44 each, toward the high end of a $13.81 to $36.80 52-week range. The P/E is 14.3 based on expectations for earnings to grow 7.4% to $2.03 in 2008.
Bank of the Ozarks operates in a stable Arkansas community and its performance this year has been impressive. Still, as long as the economy remains a pit of unpleasant surprises, investors may want to wait to see if construction loans come back to bite Bank of the Ozarks.
Headquartered in Little Rock, Ark., Bank of the Ozarks reported record net income of $9 million in the third quarter through September, up 7.2% from the previous year. Earnings per share were a record $0.53, up 6%. Dividends for the bank, with market capitalization of $479 million, yield 1.8%.
Standout results, to be sure. But Bank of the Ozarks still needs to step carefully: real estate development and construction loans pose a risk, as they do for many regional banks. Pushed out of the residential mortgage market by other lenders, these banks turned to commercial real estate loans in recent years. As yet, write-downs of commercial real estate construction loans haven’t come close to matching what remains on the books. These loans also are not targeted by the $700 billion bank bailout, which is aimed at relieving those who meddled in faulty mortgage loans and tangled derivative trades.
To some investors, construction loans are the next unmortared block waiting to fall onto the economy. Bank of the Ozarks has loans and leases of $2.06 billion, up 13.2% from a year ago, and these include a lot of construction and development loans. At the end of December, real estate loans were 82% of total loans and leases, and construction and development loans -- a subset of release estate loans -- were 37% of the total loan and lease portfolio.
Of note is Texas, where the company continued to add to loans in the third quarter, bringing these to 27% of its loan portfolio at the end of September. Bank of the Ozarks, though, was not active in adding loans in 2007, when the company would not match aggressive credit terms offered by others. Similar to moves by many banks, Bank of the Ozarks increased its allowance for loan and lease losses to $3.4 million in the third quarter, triple the allowance a year ago. Net charge-offs in the third quarter were $1.4 million.
Standard and Poors has a negative outlook for regional banks, projecting that “loan loss provisioning expenses will be relatively high for the rest of this year, and possibly much of next year as well.” S&P also notes that declining credit quality of regional banks’ loan portfolios results in the need to raise additional capital.
Bank of the Ozarks nonperforming loans and leases as a percent of total were 0.70% as of Sept. 30, up from 0.19% the previous year. Nonperforming assets as a percent of total increased to 0.66% as of Sept. 30, three times the level of a year ago.
The company has operations in 65 offices in northern, western and central Arkansas. It also has five Texas banking offices and loan production offices in Charlotte, N.C. and Little Rock, Ark. On Dec.31, total assets were $2.71 billion, total loans and leases were $1.87 billion and total deposits were $2.06 billion. Net interest income for 2007 was $77.6 million, net income was $31.7 million and diluted earnings per share were $1.89.
The bank’s profits have been padded by increases in net interest income from favorable margins. Net interest income, which accounts for 83% of total revenue, rose 25.1% in the third quarter from the previous year and 22.3% in the nine months through September.
Shares closed Wednesday at $28.44 each, toward the high end of a $13.81 to $36.80 52-week range. The P/E is 14.3 based on expectations for earnings to grow 7.4% to $2.03 in 2008.
Bank of the Ozarks operates in a stable Arkansas community and its performance this year has been impressive. Still, as long as the economy remains a pit of unpleasant surprises, investors may want to wait to see if construction loans come back to bite Bank of the Ozarks.
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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