Bank Of The Ozarks (OZRK) Q2 Earnings Beat, Stock Up

Shares of Bank of the Ozarks, Inc. (NASDAQ:OZRK) gained nearly 6.6% after the company reported a positive surprise of 3.5% in its second-quarter 2016 earnings release on Monday, before the market opened. Earnings per share of 60 cents surpassed the Zacks Consensus Estimate of 58 cents. Moreover, the results exceeded the year-ago tally by 17.6%.

Better-than-expected results were driven a rise in net interest income, service charge on deposit accounts, mortgage lending income & trust income during the quarter. Further, rise in total loans and deposits acted as tailwinds. However, rising provision for credit losses and declining other income from purchased loans and gain on sale of other assets were undermining factors.

Net income came in at $54.5 million, up 21.7% year over year.

Performance in Detail

Net revenue rose 14.9% year over year to $141.8 million. However, the figure lagged the Zacks Consensus Estimate of $156.4 million.

Net interest income grew 27% year over year to $119 million. However, net interest margin, on a fully taxable equivalent basis, declined 55 basis points (bps) to 4.82%.

Non-interest income totaled $22.7 million, down 2.3% year over year. The fall primarily reflected the decline in other income from purchased loans, gain on sale of other assets and absence of net gains on investment securities. However, these were partially offset by a rise in service charges on deposit accounts, mortgage lending income, other income and trust income.

Non-interest expense summed to $50.9 million, reflecting a rise of 16.5% year over year. The increase was mainly triggered by higher salaries and employee benefits, net occupancy expense and other operating expenses. Nonetheless, these were partially offset by a fall in amortization of intangibles.

Bank of the Ozarks’ efficiency ratio came in at 35.41%, compared with 36.56% in the prior-year quarter. A fall in efficiency ratio indicates higher profitability.

As of Jun 30, 2016, Bank of the Ozarks had total assets of $12.3 billion, while shareholders equity summed up to $1.6 billion. Further, as of the same date, total loans and leases (including purchased loans) jumped 47.5% to $9.7 billion, while total deposits surged 43.8% to $10.2 billion.

Credit Quality

Bank of the Ozarks’ credit quality reflected a mixed bag during the quarter. Annualized net charge-off ratio for all loans and leases declined 5 bps to 0.06%.

The ratio of non-performing loans and leases, as a percent of total loans and leases, fell 25 bps to 0.09% as of Jun 30, 2016.

Conversely, provision for loan and lease losses jumped 12.2% year over year to $4.8 million.

Profitability Ratios

Bank of the Ozarks’ profitability metrics deteriorated during the quarter. As of Jun 30, 2016, return on average assets stood at 1.91%, down 26 bps year over year. Additionally, return on average common equity decreased 72 bps to 14.35%.

Our Viewpoint

Bank of the Ozarks’ increasing exposure to real estate loans, margin compression and elevated expense levels remain matters of concern.

However, the company’s consistent revenue growth, expansion plans, superior asset quality and improvement in loan and deposits assure steady growth in the future.

Bank of the Ozarks currently holds a Zacks Rank #4 (Sell).

Among other South-east banks, First Horizon National Corporation (NYSE:FHN) , Trustmark Corporation (NASDAQ:TRMK) and State Bank Financial Corporation (NASDAQ:STBZ) are scheduled to announce results on Jul 15, Jul 26 and Jul 28, respectively.