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Bank OZK (OZK) Down 10% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Bank OZK (OZK - Free Report) . Shares have lost about 10% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Bank OZK due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Bank OZK Q2 Earnings & Revenues Lag Estimates, Costs Up

Bank OZK’s second-quarter 2019 earnings per share of 86 cents lagged the Zacks Consensus Estimate by a penny. The bottom line was lower than the prior-year figure of 89 cents.

Results were adversely impacted by lower non-interest income, rise in operating expenses and decline in deposit balances. However, stable net interest income, modest rise in loans and fall in credit costs were tailwinds.

Net income available to common shareholders was $110.5 million, down 3.7% from the year-ago quarter.

Revenues Down, Costs Rise

Net revenues were $251.1 million, down marginally year over year. Also, the figure missed the Zacks Consensus Estimate of $253.5 million.

Net interest income was relatively stable on a year-over-year basis at $224.5 million. Net interest margin, on a fully-taxable equivalent basis, declined 21 basis points (bps) to 4.45%.

Non-interest income totaled $26.6 million, down 2.9% from the year-ago quarter. This fall was due to decline in all components except for service charges on deposit accounts, trust income and other income. The quarter also included net gains on investment securities.

Non-interest expenses were $99.1 million, up 11.2% year over year. This rise resulted from higher salaries and employee benefits costs, net occupancy and equipment costs, and other operating expenses.

Bank OZK’s efficiency ratio was 39.30%, up from 35.19% in the prior-year quarter. Rise in efficiency ratio indicates lower profitability.

As of Jun 30, 2019, total loans were $17.49 billion, up slightly on a sequential basis. As of the same date, total deposits amounted to $18.19 billion, down 1.6% from the prior quarter.

Credit Quality: A Mixed Bag

The ratio of non-performing loans, as a percentage of total loans, increased 5 bps year over year to 0.15% as of Jun 30, 2019. Further, annualized net charge off ratio to average total loans rose 7 bps to 0.14%.

However, provision for loan and lease losses declined 29.6% from the year-earlier quarter to $6.8 million.

Profitability Ratios Deteriorate

At the end of the second quarter, return on average assets was 1.95%, down from 2.10% in the year-earlier quarter. Moreover, return on average common equity declined to 11.29% from 12.90%.

Outlook

Bank OZK expects non-purchased loans and leases to grow in the mid to high-single-digit rate in 2019, down from the prior guidance of low to mid-teens. Management expects purchased loan runoff to continue and be a headwind to overall earning asset growth in 2019 and 2020.

RESG loan repayments are expected to remain high in 2019 and exceed 2018 level due to high levels of property sales, leasing and refinancing activity. Further, RESG loan originations for 2019 will likely equal or exceed $4.74 billion achieved in 2018.

The company anticipates that the increase in cost of interest-bearing deposits (COIBD) for 2019 will be less than 67 bps recorded in 2018. Also, rise in COIBD in the remaining quarters of 2019 will be significantly less than the 19-bps increase in the first quarter of 2019.

Non-interest income for the remaining quarters of 2019 is expected to be in the range that the company has reported over the last several quarters.

The company expects the effective tax rate to be 24-26% in 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -5.14% due to these changes.

VGM Scores

Currently, Bank OZK has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Bank OZK has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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