OZK, Home BancShares Launch Into Deeper Water For Luxury Lending

Acquisition has fueled boat and recreational vehicle loan growth at the two largest banking franchises headquartered in Arkansas.

Little Rock’s Bank OZK registered a fiscal first after closing its second-quarter books on June 30. Its dynamic Real Estate Specialties Group, powered by multimillion-dollar commercial construction loans, didn’t lead the way for new loan growth.

Instead, indirect marine and RV loans did, accounting for a whopping 73 percent of second-quarter loan growth made by the $22.2 billion-asset lender, formerly known as Bank of the Ozarks.

Of the bank’s $509 million in quarterly net loan growth, the Indirect Marine & RV Lending Division topped RESG $370 million to $86 million.

“I believe it’s the first time,” said John Redmond, president of Indirect Marine & RV Lending at Bank OZK. “Seasonally, the second quarter is our strongest quarter. We have been aggressively growing our dealer base, and we will continue.”

Conway’s Home BancShares ramped up its marine financing pipeline with the $402 million purchase earlier this month of Shore Premier Finance of Chesapeake, Virginia. The deal, announced July 2, included a $383.4 million loan portfolio.

“We’ve been doing boat loans since we started,” said Johnny Allison, chairman of $14.9 billion-asset Home Bancshares. “We’re in the boat capital of the world down in Florida. We just really didn’t have a platform for it until now.”

The business of providing loans through marine and RV dealerships to buyers has blossomed in a big way for Bank OZK during the past two years.

The portfolio has grown from $89 million since Bank OZK acquired Atlanta’s Community & Southern Bank in July 2016 to more than $1.4 billion today.

“We deal in prime and super-prime loans to lifestylers with a high net worth,” Redmond said. “After the acquisition, we took our platform nationwide to all 48 [contiguous] states. We have a pretty good geographic mix nationwide. We have collateral in all 48 states.”

The number of marine and RV dealer relationships associated with Bank OZK lending has expanded from 384 to 1,229 during the past two years.

“Both industries are experiencing significant growth,” Redmond said. “As a result, we’re enjoying significant growth as well. It’s good timing in the consumer lending cycle.”

He said the growing loan portfolio and network of dealers reflect a change in status for indirect marine and RV lending under Bank OZK ownership. The group’s expanding book of business pushed it beyond the crowded ranks of regional lenders and into the top tier.

“There aren’t as many na-tional players, about a couple dozen,” Redmond said. “We’re gaining attention and taking market share from every single one of them.

“We’re somewhere in the Top 10. Given the relationships in both marine and RV and the coverage we have, we’re easily in the Top 10.”

Citing competitive concerns, Redmond declined to provide details about the ranking or a breakout of marine loans versus RV loans: “We don’t share that. Some things are better left unsaid.”

Atlanta remains the headquarters of the marine and RV lending operation, and the veteran staff has expanded from 22 to 30 under Bank OZK ownership.

“There’s a lot of experience on this team,” Redmond said. “Most of us cut our teeth with NationsBank,” predecessor of today’s Bank of America.

His own experience dates back to 1992 when NationsBank began developing a marine and RV lending operation taken on after its acquisition of Sovran Bank. Redmond led Community & Southern’s specialty lending effort, among other duties, after the bank’s January 2010 founding on the bones of the $840 million-asset First National Bank of Georgia in Carrollton through an FDIC-assisted acquisition.

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George Gleason, chairman and CEO of Bank OZK, noted that one of the gems in the acquisition of Community & Southern was its indirect marine and RV business. The $4.4 billion-asset lender also operated an auto loan business that Bank OZK opted not to develop.

“We looked at all of that and really did not like the auto loan business at all,” Gleason said during the July 12 conference call with analysts. “Felt like there was a lot of risks there and that it didn’t yield a particularly high return by our standards. On the other hand, we really liked the marine and RV business because they were pursuing a very high-quality customer and were getting better yields for it.”

Johnny Allison said the Shore Premier deal provided an economical opportunity to grow Home BancShares and avoid the sting of paying current merger and acquisition multiples.

“The prices for whole-bank M&A are too crazy,” he said. “I added 4 cents in new earnings per share. That was great for shareholder value because I didn’t spend $600 million to buy an entire bank. It was a no-brainer for me.”

Allison intends to use Shore Premier as a way to expand the company’s recreational vehicle lending.

“We’re going to bring the RV to it,” he said. “We already do floor plan and operations financing for Liberty Coach [a high-end coach builder in North Chicago, Illinois]. They’re our customer. But we have not done the consumer side.

“We’re looking to do $500,000-and-up bus loans. We’re not going to do a pop-up camper, if that’s what you’re looking at.”

The average boat loan booked by Premier Shore is $320,000, Allison said.

“They have loans in over 40 states, including a few in Arkansas. But in the case of the Arkansas loans, the boats are based in Florida.”

The big quarterly blip allowed the Indirect Marine & RV Lending Division to step out of the shadow of the much larger Real Estate Specialties Group and into the spotlight during Bank OZK’s second-quarter conference call with analysts.

Gleason expects the upward trajectory of the group to continue before settling into more of a long-term sustainable pattern.

“I think we’ve got a pretty good runway for a mass percentage growth for that portfolio over the next couple years,” Gleason said during the conference call.

He pegged the average loan size in round numbers to about $100,000.

The marine loans are secured by an assortment of watercraft: bass boats, tri-deck motor yachts, catamarans and sailboats. The RV collateral ranges from fifth-wheel travel trailers to Class A motorhomes.

“While these loans tend to be longer-term fixed-rate loans, the reality is they’re probably somewhere between three and four years on an average life because of the fact that being high-income, high net worth borrowers predominantly, these customers tend to trade up on a fairly frequent basis and they tend to have capability to pay off these loans fairly quickly,” Gleason said during the conference call.

“So, it’s really sort of three- to four-year average life project products.”

Asked to elaborate on the credit risk of the marine and RV loan portfolio, Gleason said it was slightly greater than Bank OZK’s total loan portfolio: 1.07 percent loan loss allowance versus 0.74 percent.

He said there are two factors that play into that modest difference.

First, marine and RV loans are longer duration on their contractual face amount, so the bank holds more allowance to reflect that longer duration.

Second, consumer credits have a slightly higher loss profile “even if it’s hot-prime, su-per-prime type of credit” based on the bank’s modeling.

“I think the key to the pursuit of this line of business for us is we believe it gives us diversification and exposure to the consumer segment,” Gleason said.

He said the average credit score of the bank’s marine and RV borrowers this year is 792 with a strong mix of “customers who have owned multiple RVs and multiple boats before, so they understand what they’re getting into.”

“We feel like this business really gives us a high net worth, high-income, high credit score customer that will be resilient in economic downturns,” Gleason said.

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