Bank of the Ozarks executives said it produced solid third-quarter results with strong loan growth despite a quarter of distractions and transitions.
They also said the company is planning to open a number of new branches, including two de novo locations, over the next six quarters, along with "companion branches" to meet Community Reinvestment Act obligations.
Speaking on a third-quarter earnings call, Chairman and CEO George Gleason II said the company endured a "temporary distraction" following the sudden departure of Dan Thomas, former president and chief lending officer of its real estate specialties group, or RESG. Tim Hicks, the company's newly appointed chief administrative officer and executive director of investor relations, said RESG accounted for roughly 52% of the company's growth in the funded balance of nonpurchase loans and leases.
"RESG has been our largest growth engine for earning assets for many years," Hicks said. "We expect RESG will continue to be our largest growth engine, and it will continue to increase its volume of originations, but we're pleased with the positive contribution of momentum from our various other loan and lease teams."
The quarter was also dominated by Dodd-Frank Act stress test preparations, a "significant focus" on infrastructure build out, and the fallout of major hurricanes Harvey and Irma, Gleason said. There has also been buzz surrounding the company's decision to shed its holding company earlier in the year.
He said the new branches will be larger and in highly visible locations in the Southeast, with a longer-term focus on the top-100 U.S. metropolitan statistical areas. He said in total, the company will have about 290 offices, up from 252 now. He said new branches will provide additional deposit capacity to support additional growth.
"These are very different than our traditional branches we've opened in the past," Gleason said. "They're very technology driven, they're very sales-oriented, sales force-oriented branches."
The company expects to file its first DFAST submission in July 2018, based on year-end 2017 financials. Hicks said that if the company determines it needs additional capital for the submission, the "most likely avenue" would be the issuance of subordinated debt. "At the current time, we consider it likely that we will issue some level of subordinated debt by year-end 2018," Hicks said.
Despite light loan growth during the second quarter, and a modest pullback on full-year organic loan growth projections, the company appeared to deliver during the third quarter. In a research note, Raymond James' Michael Rose wrote "fears around loan growth coming into the quarter appear to be assuaged for now."
Total loans and leases grew 11.4% to $15.78 billion, compared to $14.16 billion a year ago. In July, the company revised its $3.1 billion to $4 billion full-year loan growth guidance to the lower half of the range. Hicks didn't revise the guidance on the third-quarter call, but he said the company is experiencing a "robust pipeline of transactions currently in underwriting and closing" and its "largest ever" unfunded balance of closed loans.
"While it is early to make comments about 2019, based on our business plans and the positive momentum we have in RESG and a number of other loan categories, we expect our dollar volume of growth in nonpurchased loans and leases in 2019 to exceed 2018's growth," Hicks said.
Non-purchased loans and leases, excluding those acquired in previous acquisitions, totaled $12.05 billion, up 37.5% year over year.
"This growth does appear to be somewhat back-end weighted as average loan growth and average earning asset growth came in lighter than our expectations, which was also impacted by higher than projected purchased loan run-off," Sandler O'Neill & Partners analyst Stephen Scouten wrote. But he added he sees it as a "very strong" quarter for the company, noting that NIM, at 4.84%, was "better than expected."
Although commercial real estate lending continues to be prominent in the company's growth, Hicks said the company is working on various initiatives to achieve greater contributions from other lines of business and product types. But Gleason said that in the past, concerns about the company's higher levels of CRE were based on "poor information or lack of understanding" of Ozark's business model.
Net income applicable to common shares rose to $96.0 million, or 75 cents per share, from net income of $76.0 million, or 66 cents per share, in the third quarter of the prior year. The S&P Capital IQ consensus mean estimate for third-quarter normalized EPS was 74 cents.