Bank of the Ozarks’ stock has been surging over the past several years, and so has its commercial real estate lending. We at CrediFi have done our own analysis to figure out what exactly this Arkansas lender is getting right.
First let’s look at how the bank is doing. Its commercial real estate portfolio jumped from $1.9 billion in 2012 to $9.4 billion in 2016, and its total assets nearly doubled in just one year, from $9.9 billion at the end of 2015 to $18.9 billion at the end of 2016, the bank’s annual report and FDIC call reports show.
Its share price also outperformed that of financial ETFs over the five years ending in 2016. The share price for regional banking ETF KBWR and for XLF, the S&P financial sector ETF, both rose more than 100% from December 2011 to December 2016. In the same period, the share price for Bank of the Ozarks increased about 250%.
The real question is, what has Bank of the Ozarks been doing to improve its chances of success?
We conducted an analysis of $7.5 billion in loans issued by Bank of the Ozarks between 2012 and 2016, and uncovered something interesting: The proportion of the bank’s financing that was going to construction was increasing over time, rising from 8% in 2013 to 29% in 2016.
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Construction lending tends to be riskier than standard commercial real estate financing, yet offer higher returns. Our findings, then, mean that Bank of the Ozarks is taking a risk, and it’s paying off.
“Bank of the Ozarks has been lending heavily to construction projects, and that has been boosting its performance,” said Alex Veksler, director of capital markets at CrediFi.
Recent construction loans issued by the Arkansas lender include this year’s $38.5 million loan for 178-02 Hillside Ave. in Queens, a $30.6 million loan for 325 Lafayette Ave. in Brooklyn and a $28.5 million loan for 98 Franklin St. in Manhattan, both issued in 2016.
We also opened up the Arkansas lender’s 2016 annual report, and saw the same trend. Bank of the Ozarks’ construction lending has been going up even though banks have, overall, been cutting down on construction loans.
The annual report shows that 41% of the nationwide commercial real estate portfolio on Bank of the Ozarks’ books in 2016 was construction lending. It also shows the bank’s total commercial real estate portfolio has been growing year over year — and that construction lending has become an increasingly larger proportion of that sum.
In terms of dollar amount, commercial real estate loans on Bank of the Ozarks’ balance sheet multiplied almost fivefold over five years, in part due to a history of mergers and acquisitions. Construction loans made up 32% of the lender’s CRE portfolio in 2012, and 41% of the much higher total in 2016.
(Note that the numbers referencing Bank of the Ozarks’ commercial real estate portfolio may include a small amount of residential construction/land development loans, which are not broken out from commercial construction loans in the bank’s annual report. Commercial construction loans may also refer to land development loans. The financing represents the loans that were on Bank of the Ozarks’ books at the time of the annual report, not necessarily loans originated in that year.)
Take a close-up of New York, and you’ll see something even more striking.
A whopping three-quarters of the Arkansas bank’s real estate portfolio is in construction in New York.
This is particularly significant because New York loans constituted 24% of the Bank of the Ozarks’ commercial real estate loans in 2016 (again, this could include some residential construction). More than half the bank’s CRE financing in other states also went to construction — for instance, 59% in Texas and 52% in California — but those states had a smaller proportion of the bank’s overall loans (see below for more on the geographic distribution of Bank of the Ozark’s CRE lending).
Bank of the Ozarks CEO George Gleason cited construction lending in the bank’s Q4 2016 earnings call, saying: “Throughout 2016, we saw an accelerated trend in loan payoffs, as all categories of construction and development products have sold or been refinanced into permanent financing more quickly than we would have experienced in previous years.”
In addition to the emphasis on construction, there are several other factors that appear to have contributed to Bank of the Ozarks’ accomplishments:
Shift from small-balance loans to loans above $10 million
The focus on construction can also be seen in the number of commercial real estate loans originated by the bank from 2012-2016.
The CrediFi analysis found that the number of loans above $10 million rose from 38% in 2012 to 53% in 2016.
Bank of the Ozarks may be based in Arkansas, but this lender is hardly limiting itself to the Ozarks. Rather, it has diversified its geographic exposure.
Of all the states that are home to properties with loans financed by Bank of the Ozarks, it’s New York that sees the largest proportion (24%) of those financing dollars.
Florida takes second place, with 17% of loans, followed by Georgia and Texas (11% each), the bank’s native Arkansas (8%), California (7%) and the Carolinas (6%).
Mergers and acquisitions
One way Bank of the Ozarks has increased both its assets and its geographic diversity has been through mergers and acquisitions with over a dozen other banks.
Some of these deals helped strengthen Bank of the Ozarks in its native state of Arkansas, such as its 2014 deal with Summit Bank, while others expanded its reach out of state, like the July 2016 merger with Georgia-based Community & Southern Bank. Mergers and acquisitions have helped give Bank of the Ozarks a leg up in states including Alabama, California, Florida, Kansas, New York, North Carolina, South Carolina and Texas.
There you have it. In the course of increasing its construction lending, the size of its loan balance and its geographic reach (partly through mergers and acquisitions), Bank of the Ozarks has also seen its commercial real estate portfolio and its assets grow, as the lender continues to expand beyond Arkansas. It certainly seems to be doing more than one thing right.