Organic Growth Has Serial Acquirer Ozarks Lining Up Capital

Bank of the Ozarks, once one of the Southeast's most-prolific consolidators, seems to be reaping the benefits of those deals.

Executives of the Little Rock, Ark., company said in January that they expected organic loan growth to top the nearly $1.4 billion generated in 2014. During a conference call Tuesday, George Gleason, the $8.3 billion-asset company's chairman and chief executive, indicated that originations could exceed those projections.

Bank of the Ozarks filed a registration statement Monday that would allow it to sell an undetermined amount of common and preferred stock, along with other securities, over time. Gleason called the move a "prudent" response to keep pace with potential loan growth.

"Clearly, the fact we filed a shelf registration suggests we are thinking about growth scenarios that are more robust than" what had previously been projected, Gleason said. While the company has enough capital to support up to $2 billion in organic loan growth, he said his team is "preparing for the possibility that a really positive scenario might develop."

Bank of the Ozarks produced $331 million in new loans during the first quarter, boosting total loans and leases to nearly $6.4 billion. Growth in unfunded closed loans, which rose by $445 million during the quarter, had management particularly excited.

If the company's unfunded balances convert to funded credits, it raises the prospect of "outlandishly positive growth numbers," Gleason said. "We've got our best pipeline compared to any time in the company's history."

The company's first-quarter earnings rose 58% from a year earlier, to $39.9 million, though a key acquisition played a meaningful role in the increase. Bank of the Ozarks bought the $1.5 billion-asset Intervest Bancshares in New York in early February.

Intervest specialized in commercial real estate lending, a strongpoint it shared with Bank of the Ozarks. Indeed, Bank of the Ozarks' real estate specialties group, which handles commercial real estate lending nationwide, accounted for two-thirds of the first quarter's loan growth.

Bank of the Ozarks is "showing the market they're able to export their real estate lending expertise, not only in their core markets, but nationwide," David Bishop, an analyst at Drexel Hamilton, said in an interview. "They've built a very nice national real estate lending franchise."

The expanded scope of Bank of the Ozarks' CRE lending has not led to any decline in credit quality. In fact, the opposite seems to be true. Excluding acquired loans, the company's ratio of nonperforming assets to total assets fell to 0.56% at March 31, compared to 0.87% on Dec. 31.

Bank of the Ozarks' credit quality "is as good as it's ever been," Gleason said.

"That's saying something because they've been on top of the credit process for years," Bishop said. "They do not let problems fester. They're very good in terms of recognizing problems, developing action plans and resolving things."

Bank of the Ozarks did report a spike in net chargeoffs, which totaled $5.1 million in the first quarter compared to $388,000 a year earlier. Nearly half of the chargeoffs were tied to the sale of three syndicated loans, including the company's only energy-related credit.

The company recently implemented "significantly more-conservative underwriting standards," Gleason said, adding that the syndicated deals no longer measured up.

Bank of the Ozarks' community banking operation also seems to be hitting on all cylinders.

Excluding former Intervest customers, Bank of the Ozarks opened more than 3,400 core checking accounts in the first quarter, which should boost service charge income and improve liquidity going forward, Chief Operating Officer Tyler Vance said.

Overall numbers, which include Intervest, showed a 72% pop in deposits, to about $6.7 billion. The net interest margin held its own, narrowing by just 4 basis points from a year earlier, to 5.42%.

Bank of the Ozarks has completed a dozen acquisitions since 2010, including Intervest and seven failed banks. While excited about organic growth, Gleason said his company will likely remain a consolidator this year.

"I'll be very surprised if we don't announce one or more — hopefully more than one — transaction this year," he said.