Bank OZK: 2021 Q2 Earnings – 20 Points You Don’t Want to Miss!
- Rupam Deb
- Aug 3, 2021
- 4 min read
Bank OZK – 2021 Q2 Earnings Results
Bank OZK released its earnings for 2021 Q2 on 22 July 2021. It continued to deliver solid results with reported highest quarterly net interest income and net income, which increased by 11% and 199% respectively, year-over-year. For the first time in the company’s history, Bank OZK approved a share repurchase program for a maximum amount of $300 million (~6% of market capitalisation) with a 1-year expiration period.
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 $241 million, a 11.2% increase from $217 million in 2020 Q2, and a 2.6% increase from the $235 million in 2021 Q1. This was partly due to an increase in core spread, offset by the effect of the high level of net loan repayment in 2021 Q2. The core spread in 2021 Q2 was 5.02%, a 0.90 % point increase y/y, and 0.24 % point increase q/q. The increase in core spread was driven by a reduction in their cost of interest bearing deposits (COIBD) to 0.44%, which had significantly decreased by 0.66 % point y/y, or by 0.13 % point q/q. Given the maturation of time deposit with high weighted average interest rate in the near future, the management expected further improvements in their COIBD. Although further quarterly decreases in their COIBD may be less than that achieved in the recent quarters, continuing to lower the COIBD is one of their important strategies to mitigate the expected downward pressure on total loan yields due to low interest rate environment. For context, the weighted average interest rate for the time deposits maturing in 2021 Q3 is 0.82%, still higher than the 0.44% rate that Bank OZK achieved in 2021 Q2 for the new/ renewed time deposits.
Net interest margin (NIM) was 3.95% for 2021 Q2, a 0.21 % point increase y/y, and a 0.09 % point increase q/q. In 2021 Q1, the latest quarter for which comparative data was available, their NIM outperformed the industry by 1.3 % point (OZK’s NIM of 3.86% vs industry’s NIM of 2.56%). Bank OZK’s NIM was partly impacted by the increased amounts of liquidity in the form of cash balances and very short-term security with relatively low yield. George Gleason, the CEO, also remarked that they were at or near a peak on the NIM in the near term, stating that “We commented in our management comments that we’re originating loans at lower rates than the rates that were earned on loans last quarter. That is unfortunately a part of this very liquid low rate environment in which we find ourselves. Yields on all sorts of financial instruments and loans are lower than they were and probably lower than they should be, but it is part of the environment. So as loans roll off, we’re not able to replace those yields with equal yields. We are being diligent to not sacrifice our credit standards and structure standards that we’ve adhered to for a long time that are the hallmark of our great asset quality. But we are having to get more aggressive on price to not only replace assets that are rolling off but also grow assets. So growth is important. Pricing is a bit negotiable here. So loan yields are probably almost certainly headed lower.”
The total provision expense for 2021 Q2 was a negative $30.9 million. At end of 2021 Q2, their allowance for loan losses (ALL) for outstanding loans was $248.8 million, or 1.36% of total outstanding loans, and their reserve for potential losses on unfunded loan commitments was $58.8 million, or 0.50% of unfunded loan commitments, bringing their total allowance for credit losses, which includes the ALL and the reserve for potential losses on their unfunded loans commitments, to $307.6 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 June 2021. This model reflected improving conditions in the US economy, but were tampered by the reality that uncertainty remains about the future economic conditions. Being conservative as always, Bank’s OZK calculation included adjustments to capture certain risks not being fully reflected in Moody’s model.
Non-interest income for 2021 Q2 was $27.7 million, a 28.5% increase from $21.6 million in 2020 Q2, but a 13.6% decrease from $32.1 million in 2021 Q1. The COVID-19 pandemic significantly impacted customer activity which reduced certain categories of non-interest income, including income from service charges on deposit accounts.
Non-interest expense for 2021 Q2 was $103.7 million, a 2.7% increase from $101 million in 2020 Q2, but a 2.2% decrease from $106.1 million in 2021 Q1. In 2021 Q2, the management eliminated dozens of positions that were no longer needed, and added new headcounts to address the changing needs and expectations of their customers in this rapidly evolving environment. With the changing customer interaction, increased reliance and utilization of mobile online and other non-face-to-face technologies, the management team decided to close two branches in Arkansas and one branch in Florida and signed an agreement for the sale of their Magnolia branch in Arkansas. Closing these branches will help eliminate redundant inefficient costs, which further help improve efficiency ratio. They will continue to evaluate their branches to ensure they have an optimal branch network.
The efficiency ratio for 2021 Q2 was 38.4%, lower than the 39.6% a quarter ago, and the 42.1% a year ago. This decrease highlights Bank OZK’s constant focus on cost efficiency and strong execution, which help it to achieve high profitability and return on capital. This efficiency ratio remained in the top decile of the industry for 19 consecutive years, with industry averaging at a much higher 60% in 2021 Q1.
For the remaining points, check out our Multibagger Research Series at the link below.
For our summary analysis of the company, check out the video below.
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