Bank of the Ozarks, Inc. reported earnings per share of 34 cents in second-quarter 2014, beating the Zacks Consensus Estimate by a penny. The bottom line compares favorably with earnings of 29 cents recorded in the year-ago quarter. Notably, as a result of the 2-for-1 stock split in June, prior year per share information has been adjusted accordingly.
Our proven model had also predicted that Bank of Ozarks will post an earnings beat as it had the right combination of two key ingredients – a positive Earnings ESP and a favorable Zacks Rank #3 (Hold).
Better-than-expected results were mainly driven by an increase in net interest income, which was partly offset by higher operating expenses and provision for loans and leases losses along with a fall in non-interest income. Further, loan and leases as well as deposits exhibited growth. However, profitability ratios deteriorated during the quarter while credit quality was a mixed-bag.
Net income available to common shareholders came in at $26.5 million, up 29.9% year over year.
Quarter in Detail
Bank of Ozarks’ net revenue was $82.2 million, up 31.6 % year over year and above the Zacks Consensus Estimate of $78.0 million.
Net interest income was $64.8 million, up 49.1% from the prior-year quarter. The rise reflects an increase in average earnings assets as well as a 6-basis points (bps) increase in net interest margin to 5.62% on a fully taxable equivalent basis.
Non-interest income fell 8.4% year over year to $17.4 million. The decline was due to fall in all components except trust income and service charges on deposit accounts. In addition, amortization of the bank’s FDIC loss share receivables resulted in net amortization expense in the reported quarter as compared with gains generated in the prior-year quarter.
Further, non-interest expense increased 26.7% year over year to $37.9 million, due to a rise in all the items of expenses. Notably, unlike the prior-year quarter, Bank of Ozarks recorded pre-tax acquisition-related expenses of around $0.8 million in the reported quarter.
As of Jun 30, 2014, total loans and leases increased 29.8% year over year to $3.17 billion, while total deposits rose 67.0% to $4.98 billion.
Bank of Ozarks’ credit quality depicted a mixed bag in the reported quarter. Provision for loan and lease losses increased significantly from the prior-year quarter to $5.6 million. This was due to a rise in non-purchased loans and leases and purchased non-covered loans, partly offset by a fall in covered loans.
Further, net charge-offs were $.2.5 million or an annualized 0.21% of average loans and leases, up from $1.7 million or 0.11% in the prior-year quarter.
However, the quarter-end allowance for loan and lease losses as a percentage of total loans and leases, declined 13 bps to 1.48%. Additionally, the ratio of total non-performing assets to total assets declined 4 bps on a year over year basis to 0.62% as of Jun 30, 2014.
Profitability ratios deteriorated during the quarter. Return on average assets on an annualized basis declined 20 bps to 1.88%. Annualized return on average common shareholders’ equity decreased to 14.17% from 15.50% in the prior-year quarter. Return on average tangible common shareholders’ equity fell 42 bps year over year to 15.41%.
Though Bank of Ozarks scripted strong top line growth during the quarter, sluggish economic recovery, a low interest rate scenario and various regulatory issues might keep the financials under pressure going forward. Moreover, expense management will likely be more challenging owing to its recent acquisitions.
However, Bank of Ozarks’ solid balance sheet will likely bolster its financials in the quarters ahead.
Among other Southest banks, Capital City Bank Group Inc. is scheduled to report on Jul 22, while both BNC Bancorp and Popular, Inc. are slated to release earnings on Jul 24.