Stock Tumble at Bank OZK Attracts Lawsuits

Construction continues last month on Bank OZK's $98.8 million headquarters in Little Rock.
Construction continues last month on Bank OZK's $98.8 million headquarters in Little Rock. (Jason Burt)

George Gleason, Bank OZK’s founding chairman and CEO, expected some negative fallout when the company announced that third-quarter profits were stunted by a $45 million write-off on two bad loans.

“This quarter, we’ll unnerve some people, and some will think the wheels are falling off,” Gleason acknowledged during the Oct. 19 conference call with analysts.

A $74 million quarterly profit notwithstanding, the stumble by the bank’s stellar real estate specialties group produced a strong market reaction. The news sent the Oct. 19 trading volume of Bank OZK (Nasdaq: OZK) skyward with 20.3 million shares changing hands in sales-dominated activity that ended with a one-day price plunge of nearly 24 percent.

Adding to the volatility were chirping naysayers doubting the bank’s real estate lending prowess, and short-sellers looking to profit from any signs of weakness.

Bank OZK’s growing recognition as a lead player on the national commercial lending scene contributed to a burgeoning audience of investors. And that success also heightened the bank’s profile as a potential target of lawyers seeking to cash in on a class-action lawsuit on behalf of supposedly wronged investors.

As Bank OZK posted the market’s most precipitous stock drop of the day on Oct. 19, class action-minded law firms began trawling the internet for clients among aggrieved shareholders.

Two local lawsuits are traveling parallel courses seeking class-action status in Little Rock, one in federal court and the other in state court.

In U.S. District Court, Little Rock’s Owings Law Firm teamed up with Glancy Prongay & Murray LLP of Los Angeles to file suit on Oct. 26 claiming violations of the federal securities law.

In Pulaski County Circuit Court, Little Rock’s Poynter Law Group joined forces with RM Law PC of Berwyn, Pennsylvania, to file suit on Dec. 4 with a shareholder derivative complaint.

Officials at Bank OZK declined to comment through a corporate spokeswoman. “We don’t comment on matters in litigation,” said Susan Blair, executive vice president at the $22 billion-asset lender.

The lawsuits serve up the standard nasty class-action allegations that Bank OZK made materially false and/or misleading statements and failed to disclose material adverse facts to investors. Both lawsuits allege that the bank disclosed the following quarterly tallies of substandard loans:

• May 6, 2016: Decrease to $20.9 million.
• Aug. 8, 2016: Decrease to $16.9 million.
• Nov. 8, 2016: Decrease to $16.6 million.
• March 1, 2017: Increase to $23.8 million.
• May 5, 2017: Decrease to $20.6 million.
• Aug. 8, 2017: Increase to $52.7 million.
• Nov. 7, 2017: Decrease to $51.4 million.
• Feb. 27, 2018: Increase to $85 million.
• May 8, 2018: Decrease to $84.9 million.
• Aug. 7, 2018: Increase to $92.9 million.

The increases associated with Aug. 8, 2017, and Feb. 27, 2018, are linked with a couple of decade-old real estate loans that hit the bank’s third-quarter results last year.

The loans were secured by a tenant-needy shopping mall in South Carolina and an underperforming single-family residential development in North Carolina.

The two accounted for $45.5 million of the bank’s $48.3 million write-off total for the three months ending Sept. 30.

The write-offs led to Bank OZK replenishing its provision for loan losses to the tune of $41.9 million for the quarter.

Pretax expenses of $10.8 million related to rebranding from Bank of the Ozarks to Bank OZK didn’t help quarterly earnings either.

Gleason’s underscoring of the Bank OZK real estate specialties group’s 15-year track record of only five losing loans in a portfolio of more than 300 did little to mollify the market’s immediate reaction.

“We feel extremely confident in the quality of the portfolio and that there’s no significant risk beyond the two credits that we’ve written down,” he said during the third-quarter conference call.

Gleason tried to reassure analysts that Bank OZK had insignificant real estate lending exposure in the retail sector and the troubled mall loan wasn’t a harbinger of things to come.

“If you look back at our RESG portfolio, 20 or 10 years ago, 20-plus percent of that portfolio was retail,” he said during the third-quarter conference call. “Today, retail accounts for 1.4 percent of the RESG portfolio.”

Stock Ride
Shares of Bank OZK had traded north of $50 from early December 2016 through March 2017 before bouncing around in the $40-$49 range for the rest of the year.

Shares climbed back above $50 in January 2018 before be-ginning a slow descent to $34.85 in the days leading up to the

Oct. 19 earnings announcement. All during this time, Bank OZK was recording its usual profitable quarterly results.

Pat Burrow, executive vice president and general counsel at Pine Bluff’s Simmons First National Corp., has heard his share of class-action saber-rattling over the years.

“We’ve had East Coast law firms send out notices that they were investigating the possibility of filing a class-action lawsuit against us and fishing for plaintiffs,” Burrow said. “It happens when the stock price takes a dip in excess of what’s happening in the market.”

During the past 52 weeks, the closing price of Bank OZK shares reached as high as $53.04 on March 9 and fell as low as $21.19 on Dec. 19.

Since hitting that nadir, the stock has steadily climbed to more than $27 per share.

Heading toward its fourth-quarter earnings release on Jan. 17, Bank OZK’s 12-month stock price forecast ranged from a high of $38 to a low of $25. The median estimate among a dozen analysts was pegged at $28.

Stock watchers have attributed the rapid fall on Oct. 19 to memories of bruised and battered investment portfolios from the bursting real estate bubble of 2008.

Helping propel the descent were short-sellers who waited through many a quarter for Bank OZK to finally post non-record-setting results and generate class-action attention.

Never mind that Bank OZK sports a history of stock price growth that has averaged more than 20 percent annually during its 20-year run as a public company.

“I don’t think the lawyers look at the history,” said Matt Olney, research analyst with Little Rock’s Stephens Inc. “They look at a big stock price drop. It’s less fundamentally driven.

“That speaks to the volatility to the stock market and especially to the financial sector of the stock market.”

His take on Bank OZK on Oct. 22: “We expect the negative investor sentiment to remain until OZK can prove the third quarter 2018 credit results were an anomaly rather than the beginning of a trend.

“Given OZK’s concentration of large ticket construction loans on a national platform, we believe the stock is vulnerable to negative industry data points on commercial real estate that will likely continue through at least 2019.

“Despite the disappointing quarter, we still find it notable that OZK’s core ROA was 1.5 percent, which will likely be stronger than the Southwest Peer average.”

Olney wasn’t surprised to see the company’s October stock plunge draw class-action attention.

“It’s not unusual to see something like this,” he said. “It’s unfortunate, and it is what it is.”

Overdraft Fees Drew Past Class Action

The current shareholder-linked lawsuits directed against Bank OZK aren’t the first class-action efforts the lender has faced.

On Nov. 13, 2017, a long-running class-action dispute filed on behalf of its debit account holders in Arkansas concluded with a $2.7 million settlement. Of that award, more than $975,000 was directed to cover legal fees and expenses for the plaintiff attorneys.

Filed on Dec. 19, 2011, the case in Lonoke County Circuit Court later became a point of consolidation for a similar case filed a year later in Pulaski County. Both lawsuits centered on the bank’s overdraft fee policy of resequencing debit card transactions in order of largest to smallest.

The practice increased the amount of overdraft fees the bank could charge. Even if the debit account was overdrawn by a small amount, a customer could rack up hundreds of dollars in overdraft fees, all within a matter of hours. Bank OZK, known as Bank of the Ozarks at the time, ended the practice before the settlement was reached.

The plaintiffs also claimed the bank failed to inform its customers the fees could be avoided if they opted out of overdraft protection.