In what may be the deadest canary in the commercial real estate coal mine yet, Bank OZK shares have plunged 26% today after the bank reported abysmal third-quarter earnings that trailed expectations, with net income tumbling but what caught traders’ attention was two commercial real estate charge-offs of $45.5 million on the bank’s Real Estate Specialties Group (RESG) credits for unrelated projects in South and North Carolina.
The Little Rock-based regional bank, with just over $22 billion in assets, also reported that net income declined 23% to $74.2 million in its third quarter from the same period in 2017 due to these write-offs. Bank OZK’s earnings have been closely monitored by analysts since it is such an active real estate lender. The bank reported that the two write-offs during the third quarter were in its Real Estate Specialties Group (“RESG”) portfolio and were related to properties in South Carolina and North Carolina from loans originated in 2007 and 2008, the Real Deal reported.
The bank said in its management comments that its South Carolina charge-off was secured by a regional mall, which has suffered from both “declining property performance and increasing interest rates.” The project was further impacted by uncertainty related to anchor tenants Sears and JC Penney. The North Carolina charge-off was secured by a multi-phase land, residential lot and residential home project, with the bank noting that the homes have not sold well in part due to “cheaper pricing on existing homes.”
What shocked analysts, however, is that these properties had allowance allocations totaling only $19.1 million as of June 30. But after new appraisals, which were much lower than it initially presumed, the bank said it would have to write down each credit to about 80% of its recent appraised value. The combined charge-offs on the two loans in the third quarter came to $45.5 million.
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