One of the things that makes Bank of the Ozarks (OZK 4.59%) so different from most other banks you're likely to come across is that it has an enormous amount of off-balance sheet exposure to the commercial real estate market, which comes in the form of unfunded lending commitments.
Bank of the Ozarks has emerged as one of the biggest banks in the country from its perch in Little Rock, Arkansas. Image source: Getty Images.
What are unfunded lending commitments?
When a commercial real estate developer applies for financing with Bank of the Ozarks, the two often come to an agreement long before loan proceeds change hands. A lag like this is in fact common in commercial real estate projects, where financing must generally be lined up long before construction commences.
This is presumably the case, for example, with Bank of the Ozarks' $80 million loan to finance a 161-acre mixed-use development a few miles from downtown Boston, Massachusetts, that also happens to lie in the flight path of Logan International Airport.
The financing agreement was reported by local media in July of this year, but the current occupant of the land, a horse racetrack, won't vacate it until the middle of next year. In the interim, it's fair to think that little money will change hands until possession can be transferred in exchange.
Data source: Bank of the Ozarks. Chart by author.
Bank of the Ozarks' off-balance exposure
All told, Bank of the Ozarks has amassed $11.9 billion in unfunded lending commitments, the "vast majority" of which relate to "construction loans for which construction has commenced," the bank explains in its first-quarter 10-Q.
That marks a meaningful increase from just five years ago, when the figure was less than $1 billion. All told, nearly half of Bank of the Ozarks' total real estate exposure consists of off-balance sheet commitments like this, whereas five years ago they equated to less than a quarter.
Data source: Bank of the Ozarks. Chart by author.
Where have all of these unfunded lending commitments come from? Almost all of it, 93%, is attributable to the bank's real estate specialties group, or RESG, which has spent the past five years financing large commercial construction projects in virtually every major metropolitan area in the country.
According to regulatory data, Bank of the Ozarks' off-balance sheet exposure equates to 70% of its assets. That's six times higher than the 12% of total assets that off-balance sheet obligations account for at the average bank.
When do these commitments come due?
Given all of this, investors might be interested to known when Bank of the Ozarks' off-balance sheet lending commitments come due. The bank discloses this in regulatory reports, with the latest maturity schedule replicated in the table below:
|
Maturity |
Bank of the Ozarks' Unfunded Lending Commitments ($thousands) |
|---|---|
|
2017 |
352,606 |
|
2018 |
1,806,913 |
|
2019 |
3,945,464 |
|
2020 |
4,606,300 |
|
2021 |
930,712 |
|
Thereafter |
241,684 |
|
Total |
11,883,679 |
Data source: Bank of the Ozarks' 2Q17 10-Q, page 22.
As you can see, most of Bank of the Ozarks' off-balance sheet commitments mature over the next three years, with only 10% or so coming due thereafter.
The question to watch going forward, in turn, revolves around how the bank will finance this growth. Will it do so by increasing deposit rates across its physical branch network? Will it buy another bank?
It remains to be seen, but it's something that current and prospective shareholders in Bank of the Ozarks should probably keep their eyes on.
