The similar challenges facing these different niche lenders
County Bancorp is a $1.5 billion institution with four branches and a headquarters office in Manitowoc, Wis. The $23 billion-asset Bank OZK, with 254 branch locations, is based in Little Rock, Ark., about 820 miles south.
Clearly, the banks are very different. Bank OZK is a major player in New York’s commercial real estate market. County, the holding company for Investors Community Bank, specializes in dairy lending. But they share a common thread: ongoing problems that cast shadows over otherwise solid earnings reports.
For County, it was an uptick in classified assets; for Bank OZK, it was continued high prepayment levels.
Indeed, for Bank OZK, the quarter ending June 30 would have been a blowout — if only it could keep loans on its books. Prepayments in its much-watched real estate specialties group portfolio totaled $1.54 billion. The RESG loan balance actually shrank 2% to $9.29 billion, even as the group’s lenders closed $1.3 billion of loans. The RESG lenders do big-ticket CRE deals around the country.
Bank OZK reported $110.5 million in profits for the quarter ending June 30, but that amount was down nearly 4% year over year. As a result, Chairman and CEO George Gleason spent much of his time on a conference call Friday explaining how the bank planned to rev its growth engine.
The prepayment trend, which is also affecting Bank OZK’s community banking sector, “certainly provides a headwind for total loans and average earning assets,” Gleason said. “It’s a battle to grow … when you’ve got as many prepayments as we do.”
Gleason, who has led Bank OZK since 1979, called today’s competitive environment “crazy.” With every loan that prepays and is refinanced by another lender, “we make the comment we’d never do that loan at that leverage or at those credit terms. Or we say we’d never do that loan at that pricing,” he said.
Repayments could exceed record second-quarter levels for the remainder of the year, Brian Martin, who covers Bank OZK for Janney Montgomery Scott, wrote Friday in a research note.
Second-quarter results were a far cry from Bank OZK’s heyday from 2012 to 2017, when net income grew at a 41% compound annual growth rate. To get back on track, Bank OZK plans to build on success it has had in new community banking business lines, including Small Business Administration, business aviation and charter school lending.
“Collectively, we’re hoping that every quarter we see a little more scale and volume” from the community banking segment, Gleason said.
Second-quarter earnings were also down at County Bancorp, which reported profits of $3.7 million, off 5% from a year earlier. Despite the decline, County’s results met consensus estimates, which Hovde analyst Joe Fenech counted as a plus.
“Given the array of challenges facing the company … our high-level takeaway is that any quarter in which the company can approach or meet the consensus earnings-per-share forecast and meaningfully build book value, as was the case in the second quarter, should be considered a productive result,” Fenech wrote Friday in a research note.
Yet there still may be causes for concern, Fenech added, noting classified assets resumed an upward trajectory after abating somewhat in the first quarter.
County’s nonperforming assets were 1.94% of total assets at June 30, well above the industry average of 0.60%. Substandard loans jumped about $10 million linked-quarter to $117.8 million.
Agricultural loans make up 62% of County’s $1.15 billion portfolio, so fluctuations in commodity prices are a big deal for it. Indeed, Fenech has argued a correlation exists between County’s stock price and milk price volatility.
Fortunately, the extended run of depressed commodity prices that led to the increase in problem loans appears to be ending, CEO Timothy Schneider said Thursday on a conference call.
“The early part of 2019 had some quite low milk prices in January and February, in that $13-$14 range,” Schneider said. “What we're seeing out the next six months is pretty much all over $17 and even approaching $18 a hundredweight for their base price, so we're feeling better.”
If milk prices remain in that range over the next year, County could see a significant reduction in problem loans, Schneider added.
“Overall, we’re feeling like we’ve got our arms wrapped around things,” Schneider said.
Despite its elevated levels of classified loans, County’s credit losses were minimal. Second-quarter charge-offs totaled $2.1 million or 0.18% of total loans. Bank OZK’s net charge-off ratio was even lower, totaling 0.14% for the three months ending June 30.