Lender’s net in 1Q plunges by 89.3%

LR’s Bank OZK notes ‘downturn’

Profit at Bank OZK was decimated in the first quarter as net income dropped 89.3% to $11.9 million, driven by the “sudden and severe economic downturn” brought on by the coronavirus and more stringent accounting standards, the company announced Thursday.

The bank increased provisions for credit losses by $117.7 million, increasing its total loan loss reserves to $316.4 million for the quarter that ended March 31.

As a result, earnings per share dropped 89.5% to 9 cents per share, compared with 86 cents per share reported in the first quarter of 2019.

“As we navigate the various challenges created by the current economic environment, we will continue to seek to capitalize on investment and other opportunities which may arise from such turbulent conditions,” Chairman George Gleason said in a news release. “We believe our team of industry and technology professionals is well-positioned to lead the bank to continued success.”

Like other financial institutions this quarter, Bank OZK’s profits were consumed by new accounting standards that tightened

regulations around loan loss reserves and the economic destruction caused by the coronavirus pandemic.

The Current Expected Credit Losses accounting method requires banks to estimate expected losses over the life of loans versus the previous standard that required them to account only for incurred losses.

This is the first quarter that financial institutions have been asked to report loss reserves in line with the credit-loss standards.

Bank OZK said it relied on economic forecasts provided by Moody’s to calculate its allowance for credit losses. The Moody’s forecast includes economic variables such as gross domestic product, unemployment rates and residential real estate prices, among others. All of those indicators have changed dramatically because of the virus. For example, the Moody’s forecast assumed a -18% growth rate in GDP in the second quarter of 2020. Unemployment was projected to rise dramatically as well.

Bank OZK reported total assets of $24.6 billion for the quarter, a 6.8% increase from $23 billion during the same period in 2019. Total deposits were $18.8 billion in the quarter, increasing 1.8% from $18.5 billion last year.

The bank noted, in management comments released along with earnings Thursday afternoon, that its “core earnings power was clearly on display” as it achieved profits of nearly $12 million during a quarter of national financial upheaval.

Little Rock banking analyst Garland Binns noted another highlight – the company continued to contain expenses in the quarter.

“If there is a bright spot,” Binns said, “Bank OZK continues to control its overhead costs with an efficiency ratio of 43.4% compared to 38.5% for the first quarter of 2019.” The efficiency ratio highlights what it costs to make $1.

The bank reinforced that it believes it has a solid financial foundation to weather the pandemic. “Our strong capital position has us very well positioned to navigate the economic environment resulting from the Covid-19 pandemic and to capitalize on future opportunities,” officials noted in the management comments.

To help customers during the pandemic, Bank OZK implemented its disaster relief loan program and had provided short-term payment deferrals on 1,675 loans totaling $356 million through Wednesday.

The bank also provided $325 million in loans to nearly 2,100 small businesses through the federal government’s emergency plan for the pandemic. That program, administered by the U.S. Small Business Administration, ran out of funding on April 16.

Net interest income, the bank’s largest category of revenue, dropped 7.1% in the quarter to $209.8 million, compared with $225.9 million in the first quarter of 2019.

Net interest margin continues to drop, falling to 3.96% in the first quarter of 2020 from 4.53% over the same period a year ago.

The company has banking operations and more than 250 offices in Arkansas, Georgia, Florida, North Carolina, Texas, Alabama, South Carolina, New York, California and Mississippi.

Bank OZK has scheduled a management call at 10 a.m. this morning to review earnings with analysts who follow the company. Those interested can dial in at (844) 818-5110. A recorded playback will be available for one week at (855) 859-2056.