Bank Of The Ozarks: Still A Buyable Growth Story

| About: Bank of (OZRK)

Summary

Bank of the Ozarks’ growth story continued with the 2Q results.

There are a number of key fundamentals ahead that build a supportive case for the company.

Despite its premium valuation, Ozarks is still a buy with its exceptional growth story.

Bank of the Ozarks (NASDAQ:OZRK) reported another solid quarter led by fascinating loan growth and intact asset quality as the bank recorded an EPS of $0.60, coming 1 cent ahead of the consensus. For 1H16, net income reached $231 million growing 29% y/y; however, ROATCE declined to 15.76% for the same period from 17.4% in 1H15.

Bank of the Ozarks - Financial Data

1H16

1H15

Change

Income statement data (in USD thousands):

Net interest income

231,555

179,246

29.2%

Provision for loan and lease losses

6,851

10,623

-35.5%

Non-interest income

42,597

52,337

-18.6%

Non-interest expense

98,614

93,908

5.0%

Net income

106,162

84,670

25.4%

Common stock data:

EPS

1.16

0.98

18.4%

BVPS

17.16

13.93

23.2%

TBVPS

15.51

12.21

27.0%

Balance sheet data at period end (in USD thousands):

Assets

12,279,579

8,710,435

41.0%

Non-purchased loans and leases

8,214,900

4,767,123

72.3%

Purchased loans

1,515,104

1,830,424

-17.2%

Allowance for loan and lease losses

65,133

56,749

14.8%

Investment securities

824,399

782,277

5.4%

Deposits

10,195,072

7,087,299

43.8%

Other borrowings

264,377

161,931

63.3%

Subordinated debentures

117,962

117,403

0.5%

Common stockholders' equity

1,556,921

1,209,254

28.8%

Selected ratios (%):

ROAA

1.95

2.15

-0.20

ROACE

14.18

15.23

-1.05

ROATCE

15.76

17.40

-1.64

Equity to Assets

13.74

14.11

-0.37

NIM

4.87

5.39

-0.52

Efficiency ratio

35.46

39.67

-4.21

NCO Ratio

0.06

0.22

-0.16

NPL Ratio

0.09

0.34

-0.25

ALLL Ratio

0.78

1.19

-0.41

Click to enlarge

For the last couple of years, Ozarks has maintained astonishingly fast loan growth, particularly in commercial real estate. Macroeconomic tailwinds have also helped the bank grow its business in that area. Real estate accounted for roughly 70% of total non-purchased loans and 90% of the unfunded commitments. While a heavy concentration on this segment may pose some risks, the bank maintained superior credit metrics.

Ozarks' net charge-offs rate was at 6 basis points which is rarely seen across the banking universe. We probably should see charge-offs rising in the upcoming quarters, ending the year above 0.1%. That said, average loan to cost ratio for the real estate portfolio was a very conservative 49.1%. The asset quality ratios coupled with low leverage signal the continuation of the benign asset quality cycle in Ozarks.

Loans to deposits ratio of the bank has increased to 95% for the first half of the year. The above industry average ratio may lead some concerns around the bank's funding capabilities. However, the completion of pending acquisitions and new branch openings will help the bank remain intact, though, the bank is still to face a moderately higher cost of funding.

Not surprisingly, we have seen NIM coming in lower in the recent quarter and we are likely to see the continuation of this downward trend in the margins over the next two quarters. With that being said, no major margin compression should be expected since the bank has floor rates in almost all variable rate loans. Also note that slightly improving LIBOR rates will be providing support for net interest income to some extent.

Regarding the efficiency and expenses, the future looks great for Ozarks. The management guides for a sub-30% target efficiency ratio and hopes the recent acquisition will help a lot. I believe that the bank would achieve this target despite higher expenses due to system conversion costs.

Capital adequacy is also very important for Ozarks, which has been posting spectacular business volume growth. We will probably see a significant amount of subordinated debt obtained in the near future which would bring relief to capital adequacy. I also should underline that the bank may opt for preferred and common stock offerings.

Click to enlarge

Trading at 14.5x 2016E P/E and 2x 2016E P/BV, Ozarks is overvalued when compared to its peers, however, lower than its average mid cycle multiples. Key fundamentals build a supportive case for Bank of the Ozarks going forward. Ultimately, I continue to consider the stock as a buy with a price target of $55 which implies roughly a 50% upside potential.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.