Bank OZK: 2021 Q1 Earnings – 20 Points Not to Miss!
- Rupam Deb
- Jun 11, 2021
- 4 min read
Bank OZK 2021 Q1 Earnings Results
Bank OZK released its earnings for 2021 Q1 on 22 April 2021. For this quarter, Bank OZK reported their highest quarterly net income ever in their company history. The total provision expenses have reversed to negative. This reversion was expected as the economy started to recover. This was something we had already commented in our previous earnings updates, e.g. in the update for 2020 Q2. Their other financial metrics have also been very solid as always. Additionally, Bank OZK has developed a new business unit to increase diversification and organic growth called Asset Based Lending (ABL) unit, whose primary role is focusing on lending to medium size businesses. This new unit was anticipated to contribute meaningfully to their overall loan growth in 2022.
Here’s our detailed summary of the 20 key points from the quarterly earnings results and earnings call!
Net interest income for the quarter was $235 million, an increase of 11.9% from 2020 Q1, but a 1.2% decrease from the $238 million in 2020 Q4. These were mainly due to an increase in core spread. In 2021 Q1, the core spread improved to 4.78%, a percentage point increase of 0.59% or 0.21% compared to 2020 Q1 and 2020 Q4, respectively, offsetting the elevated level of net loan repayments in 2021 Q1. The increase in core spread was primarily due to a reduction in their cost of interest bearing deposits (in short, COIBD). Given the maturation of time deposit with high weighted average interest rate in the near future, the management expected further improvements in their COIBD. For context, the weighted average interest rate for the time deposits maturing in 2021 Q2 is 1.13%, much higher than the 0.36% rate that Bank OZK achieved in 2021 Q1 for new and renewed time deposits.
Net interest margin (in short, NIM) was 3.86% for 2021 Q1, a percentage point decrease of 0.10% or 0.02% from 2020 Q1 and 2020 Q4, respectively. This was partly due to their increased amount of investment with high liquidity in the form of cash balances and very short-term securities which had relatively low yield, reflective of their quality and short-term nature. This negatively impacted the NIM despite the increase in core spread. However, Bank OZK continued to outperform the industry on NIM. In 2020 Q4, the latest quarter for which comparative data was available, their NIM outperformed the industry by 1.2% (i.e. Bank OZK’s 3.88% versus industry’s 2.68%).
Net income for 2021 Q1 was a quarterly record of $148 million, a 1,151% (or $136 million) increase from $12 million for 2020 Q1. However, please keep in mind that this drastic increase in net income was driven by a large change in provision expense (of negative $32 million in 2021 Q1, versus positive $118 million in 2020 Q1). To ignore the impact of this change in provision expense and the associated tax impact, we can focus on the net interest income line, which as discussed earlier, increased by 12% or $25 million, from $210 million in 2020 Q1 to $235 million in 2021 Q1. Meanwhile, the amounts of non-interest income and non-interest expenses broadly stayed the same year-over-year, if we ignore the one-off gains relating to the sale of two South Carolina branches (of $4 million) and BOLI death benefit income (of $1 million).
The total provision expense for the quarter was a negative $32 million. This was not surprising, as in our previous earning updates, we had mentioned that if the economy recovered relative to the projection, then the future provision expenses could be zero or even negative. As of 31 March 2021, Bank OZK’s allowance for loan losses (in short, ALL) for outstanding loans was $268 million, or 1.4% of total outstanding loans. Their reserve for potential losses on unfunded loan commitments was $74 million, or 0.6% of unfunded loan commitments. This brought their total allowance for credit losses (in short, ACL), which included the ALL and the reserve for potential losses on unfunded loans commitments, to $342 million. The calculation for provision expense and total allowance for credit loss was based on assumptions of recent economic forecasts provided by Moody’s, which already included their updates in March 2021. Being even more conservative, Bank’s OZK calculation included adjustments to capture certain risks not being fully reflected in Moody’s model.
On total loans balance, their total loans balance at the end of 2021 Q1was $18.7 billion, a 2.7% or $0.5 billion increase from end 2020 Q1. However, due to a high level of net loan repayments in 2021 Q1, the total loans balance decreased $0.5 billion, or 2.6% not annualized from end 2020.
Non-purchased loans accounted for 96% of their total loans. Non-purchased loans at 31 March 2021, increased $1.0 billion, or 5.6% from 31 March 2020. However, due to a high level of net loan repayments in 2021 Q1, the outstanding balance of non-purchased loans decreased $0.4 billion, or 2.3% not annualized, as compared to 31 December 2020.
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