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Bank OZK (OZK) Down 5.8% 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 5.8% 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 Beats on Q2 Earnings Despite Higher Provisions

Bank OZK’s second-quarter 2020 earnings per share of 39 cents surpassed the Zacks Consensus Estimate of 35 cents. However, the bottom line indicates a decline of 54.7% from the prior-year quarter’s reported number.

In the reported quarter, the company recorded a decline in revenues along with higher expenses. Moreover, a significant increase in provision for credit losses hurt performance to some extent. Nevertheless, the balance sheet position remained strong. Loans and deposits witnessed an increase.

Net income available to common shareholders was $50.3 million, down from $110.5 million in the year-ago quarter.

Revenues Decline, Expenses Rise

Net revenues were $238.2 million, down 5.2% year over year. Nonetheless, the figure surpassed the Zacks Consensus Estimate of $234.5 million.

Net interest income was $216.6 million, down 3.5% on a year-over-year basis. Net interest margin, on a fully-taxable equivalent basis, declined 71 basis points (bps) to 3.74%.

Non-interest income totaled $21.6 million, down 18.8% from the year-ago quarter. The fall was due to a decline in almost all components, except for other income and gains on sales of other assets.

Non-interest expenses were $101 million, up 1.8% year over year. The rise resulted from higher salaries and employee benefits costs as well as net occupancy and equipment costs.

Bank OZK’s efficiency ratio was 42.07%, up from 39.30% in the prior-year quarter. A rise in efficiency ratio indicates lower profitability.

As of Jun 30, 2020, total loans were $19.31 billion, up from $17.53 billion recorded as of Dec 31, 2019. As of the same date, total deposits amounted to $20.72 billion, up from $18.47 billion recorded as of Dec 31, 2019.

Credit Quality Worsens

The ratio of non-performing loans, as a percentage of total loans, increased 3 bps year over year to 0.18% as of Jun 30, 2020. Moreover, provision for credit losses increased significantly from $6.8 million in the year-earlier quarter to $72 million.

Annualized net charge off ratio to average total loans increased from 0.14% to 0.29% on a year-over-year basis.

Profitability Ratios Deteriorate

At the end of the second quarter, return on average assets was 0.78%, down from 1.95% in the year-earlier quarter. Return on average common equity declined year over year to 4.92% from 11.29%.

Outlook

The company expects Real Estate Specialties Group (“RESG”) loans to be the largest contributor to total loan growth during 2020.

RESG loan repayments are expected to remain significant in 2020 due to property sales and refinancing activity. However, repayments will likely be more heavily weighted toward the fourth quarter of 2020 and be lesser than 2019.

Further, Indirect RV & Marine loan portfolios are expected to continue declining in 2020.

The company expects cost of interest-bearing deposits to decrease in the second half of 2020 and first half of 2021.

The company expects gains on sale of about $7-$9 million from the sale of the four branches in South Carolina and Alabama.

Management expects purchased loan runoff to prevail and be a headwind to overall earning asset growth in 2020.

The effective tax rate is expected to be in the range of 23.5-24.5% for 2020.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted 5.99% due to these changes.

VGM Scores

At this time, Bank OZK has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 looks promising. Notably, Bank OZK has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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