• Tue. Feb 27th, 2024

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Restructuring, Loan Growth Aid Bank OZK (OZK) Amid Cost Woes

Bank OZK’s OZK business restructuring and branch consolidation initiatives, along with solid loan balances, are expected to continue supporting top-line growth. Given a solid liquidity position, the company is expected to sustain efficient capital deployment activities, thus, enhancing shareholder value.

However, operating expenses might remain elevated on the back of the company’s efforts to improve technology and continued investments in franchise, thus, hurting profits.

The Zacks Consensus Estimate for the company’s current-year earnings has been unchanged over the past 30 days. This shows that analysts have a neutral stance toward the stock. Thus, OZK currently carries a Zacks Rank #3 (Hold).

Over the past year, shares of Bank OZK have lost 9.8% compared with a decline of 5.2% recorded by the industry.


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Image Source: Zacks Investment Research


Looking at fundamentals, Bank OZK’s revenues witnessed a compound annual growth rate (CAGR) of 9.4% over the last six years (2016-2021), mainly driven by steady loan growth and a rise in fee income. The uptrend in revenues continued in the first quarter of 2022.

Given a strong balance sheet position, the company is expected to keep expanding through acquisitions. Bank OZK has been able to grow deposit balances. Over the five-year period ended 2021, deposits witnessed a CAGR of 4.1%. Of the total deposits, 24.6% comprised non-interest-bearing deposits as of Mar 31, 2022.

The change in the operating backdrop in 2020 led banks to realign their businesses per customer needs, with more emphasis on digitization. Thus, Bank OZK evaluated its branch network and, hence, exited from Alabama and South Carolina, while closing branches in Arkansas, Florida, Georgia and New York.

The company’s capital deployment activities remain impressive. It has been regularly increasing its quarterly dividend. In April 2022, it hiked dividend for the 47th consecutive quarter. In July 2021, the company announced a share repurchase program worth up to $300 million through Jul 1, 2022. In October, it increased the authorization, which now totals $650 million and will expire on Nov 4, 2022. As of Mar 31, 2022, nearly $324 million worth of shares were left to be repurchased.

However, OZK’s net interest margin (NIM) has remained under pressure for the past several years amid the low interest-rate environment. NIM witnessed a declining trend — 4.34% in 2019, 4.59% in 2018, 4.85% in 2017, 4.92% in 2016, 5.19% in 2015, 5.52% in 2014, 5.63% in 2013 and 5.91% in 2012. While NIM increased in first-quarter 2022 and 2021, the same is not expected to witness significant improvement in the near term despite the recent rate hikes.

Moreover, over the last six years (2016-2021), OZK’s expenses witnessed a CAGR of 11%. The rise was mainly due to an increase in salaries and employee-benefit costs. The upward trend in expenses persisted in the first quarter of 2022. As the company is expanding into newer areas organically, as well as through acquisitions, expenses are expected to continue rising.

Bank OZK’s substantial exposure to real estate loans is a headwind. The company’s exposure to these loans was 77.3% of total loans as of Mar 31, 2022. Though the housing and real estate sectors have been improving, any deterioration in real estate prices will likely pose a threat to the company’s financials.

Stocks Worth Considering

A couple of better-ranked stocks from the finance space are S&T Bancorp, Inc. STBA and Arrow Financial Corporation AROW. STBA and AROW currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The consensus estimate for S&T Bancorp’s current-year earnings has been revised 13.7% upward over the past 60 days. Over the past year, STBA’s share price has declined 11.6%.

Arrow Financial’s current-year earnings estimates have been revised 3.2% upward over the past 60 days. AROW’s shares have lost 9.4% over the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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