Bank of the Ozarks Is Getting Bigger Thanks to FDIC Acquisitions

| About: Bank of (OZRK)

The Bank of the Ozarks (NASDAQ:OZRK) may have a clunky name, but its growth strategy is anything but slow paced. A string of FDIC brokered acquisitions is expanding the bank's reach beyond Texas and Arkansas into the Southeast. These deals are boosting assets, increasing customer counts and geographic reach and offering significant growth opportunity over the next few years.

Since the start of 2010, the bank estimates it has bid on over 50 failed banks. Its goal? To buy them cheap using a conservative low bid strategy. Of the 50, the company has won 7 deals, a good indication the bank is succeeding in not overpaying. And, that means good things for investors.

The deals involve little known small banks. They include Oglethorpe, with two Georgia branches, and Unity National, with five Georgia branches. And, Woodlands with one branch in Alabama, one branch in Georgia, two branches in South Carolina and two branches in North Carolina. Horizon, with four Florida offices, and Chestatee Banks with four Georgia branches. Most recently, they include The Park Avenue Bank and First Choice Community Bank, which added another 18 offices in Georgia and an additional office in Florida.

These acquisitions aren't big deals worthy of national press. Instead, they're targeted acquisitions which have expanded the bank, particularly into Georgia where it now operates 30 branches.

The bank's recent acquisitions alone added $670 million in deposits and $450 million in loans. In total, Q2 acquisitions increased deposits by some 35% to $3.17 billion, up 46.9% year-over-year. The company's total assets increased 40% to $4.03 billion.

And, the deals are designed to contain risk thanks to FDIC agreements to reimburse up to 80% on losses on disposed loans and foreclosures, Including such covered loans, loans and leases were $2.71 billion, up 33.7% from last year.

Last quarter, The Bank of Ozarks generated record net income of $50.2 million. It's earnings per share came in at $2.91, up 355% from $0.64 last year. And, its net interest margin ("NIM") was the highest in history, up 70 basis points from last year to 5.80%. Even if we back out the $2.11 benefit in the quarter due to the completion of its 6th and 7th FDIC arranged marriages, the bank still earned $0.80; 25% higher than last year.

Acquiring failed banks means more bad debt on the books. But, improving non-performing loan and delinquency trends offset this risk. In the quarter, the ratio of non-performing loans and leases increased 0.22% to 1.09%. But, 0.21% of this increase was tied to customers who have since brought accounts current.

The bank's funding costs have dropped thanks to legacy CDs rolling off and being converted into lower cost savings deposits. Average funding costs fell to 0.85% from 1.11% as greater than $100,000 time deposits fell to $481 million from $511 million in the past year. At the same time, savings deposits rose to $1.34 billion from $950 million and non-interest bearing deposits increased to $314 million from $235 million.

In July, the bank bumped its dividend up 5.6% to $0.19, bringing its current yield to 1.5%. It has a small float and 27 days of average volume held short. If the company can effectively leverage its new customers, and credit quality continues to improve, those short sellers may find themselves covering. Particularly, as the bank continues to build new branches in its homegrown Texas and Arkansas markets, both of which offer lower than national unemployment rates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.