Bank OZK: 2021 Q3 Earnings – Key Points to Know!
- Rupam Deb
- Nov 4, 2021
- 4 min read
Bank OZK – 2021 Q3 Earnings Results
On 22 October 2021, Bank OZK announced its Q3 earnings for 2021. It continued to deliver solid results with strong net income being their best quarterly results ever, with a 19% annual growth. For the first time in their history, they had repurchased 0.9 million shares at a weighted average cost of $41.61, for a total of $37 million in 2021 Q3, and they planned to be more active in share repurchasing in 2021 Q4.
Here’s our key points from the quarterly earnings results and earnings call!
Total interest income for 2021 Q3 was $263 million, a slight 2% decline from the $268 million a year ago, or 0.5% decline from the $264 million a quarter ago. The annual decline was mainly due to lower total loan balances, while the quarterly decline was mainly due to a slightly lower total loan yield.
However, net interest income for 2021 Q3 was a record high of $248 million, a 10.4% increase y/y or a 3% increase q/q. This was partly due to a higher core spread of 5.08% (which was a 0.81% points increase y/y or a 0.06% points increase q/q), offset by the high level of net loan repayments in recent quarters.
The increase in core spread was driven by a reduction in their cost of interest bearing deposits (COIBD) to 0.31%, which was a 0.57% points decrease y/y or a 0.13% points decrease q/q. Given how the volume and average interest rates on time deposits maturing over the next four quarters compare with their new and renewed time deposits in 2021 Q3, the management expected a further improvement in their COIBD in the near term, although such improvements will likely be less than in recent quarters.
Their retail and deposit teams are working to grow non-interest bearing longer-term core accounts, and the benefit of that should be seen when they get into a rising rate environment, where their deposit betas will be much less in a rising rate environment than they experienced in the last rising rate environment. In the long run, their goal is to improve the quality of that deposit base so it performs better in the next cycle.
Although they have done well on lowering COIBD, George Gleason (the CEO) commented that they are likely almost at the highest NIM and core spread they can get, as the loan they originated had noticeably lower rate than a lot of the loans that are on the books and these loans will start funding next year, causing their loan yields to go a bit lower in the future.
Net interest margin (NIM) was 4.16% for 2021 Q3, a 0.47% point increase y/y, and a 0.21% point increase q/q. In 2021 Q2, the latest quarter for which comparative data was available, their NIM outperformed the industry by a record high level of 1.45% point (OZK’s NIM of 3.95%, vs industry’s NIM of 2.50%).
This was achieved despite the dilutive impact on Bank OZK’s NIM from holding increased amounts of liquidity in the form of cash balances and very short-term security with relatively low yield in this year.
As a result of improved economic conditions and prospects for improvement in the US economy, the total provision expense for 2021 Q3 was a negative $7.5 million, a reverse from the positive $7.2 million a year ago. Total allowance for loan losses (ALL) for outstanding loans was $237.7 million (or 1.30% of total outstanding loans). Their reserve for losses on unfunded loan commitments was $61.1 million (or 0.49% of unfunded loan commitments), bringing their total allowance for credit losses (ACL), which includes the ALL and the reserve for losses on their unfunded loan commitments, to $298.8 million.
The calculation for provision expense and total allowance for credit loss was based on the assumptions of recent economic forecasts provided by Moody’s, which already included their updates in September 2021. Although Bank OZK has utilized this Moody’s forecast, they still made adjustments to capture certain risks not being fully reflected in Moody’s model, to be conservative, as usual.
Non-interest income for 2021 Q3 was $26 million, a 2.6% decrease y/y, and a 6.3% decrease q/q.
Non-interest expense for 2021 Q3 was $110 million, a slight 4.5% increase y/y and a 6.4% increase q/q. Non-interest expense for 2021 Q3 included non recurring expenses of about $3.0 million, comprising $2.0 million charges for branch closures, and $0.8 million related to previously unamortized deferred origination costs of the 5.50% notes redeemed in July.
The management expected an uptrend in non-interest expenses in the near future due to a competitive environment in the labor market. However, given that the circa $3 million non-recurring expenses would go away in the future, and that Bank OZK had increased some of the salaries earlier on in the year, they expected that the current $110 million total non-interest expenses should be a good run rate for the next quarter or two.
In 2021 Q3, Bank OZK closed three branches – two in Georgia, and their only deposit-taking branch in New York. In 2021 Q4, they still expected to close three more branches in Arkansas and Florida, and open one new branch in Florida. The management will continue to evaluate the profitability of each branch to ensure they have an optimal branch network.
The efficiency ratio in 2021 Q3 was 40.1%, a decrease from the 41.8% a year ago, but an increase from the 38.4% a quarter ago. This efficiency ratio still remained among the best in the industry in the top decile of the industry for 19 consecutive years.
For the remaining points of this earnings summary, check them out at our Multibagger Research Series (linked below).
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For our summary analysis of the company, check out the video below.
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