Zacks Investment Research

July 14, 2006

Equity Research

Scott A. Jaggers, CFA



Bank of the Ozarks, Inc.

Current Recommendation

Prior Recommendation

Date of Last Change

Current Price (07/13/06)

Six-Month Target Price

155 North Wacker Drive

Chicago, IL 60606

(OZRK-NSDQ)

Hold

Sell

05/23/2006

$30.02

$32.00

OUTLOOK

OZRK hosted a conference call this morning after its

earnings release last night. Nothing in the call

changed our view relative to what we discussed in our

Note. Management did clarify that there have been no

bonus accruals so far in 2006. The quarter was solid

(EPS was $0.02 better than our estimate), but not

quite as strong as the headline implies. NII was below

our projections, owing to a 23 bp decrease in NIM.

The surprise came on the expense side, as expected

growth from new branches and new hires was not

evident. Our near-term estimates are little-changed,

while 07 is coming down marginally. Our price target

is falling in line with lower industry multiples overall.

We view the $0.40 annual dividend as secure.

SUMMARY DATA

52-Week High

52-Week Low

One-Year Return (%)

Beta

Average Daily Volume (sh)

$38.42

$30.02

-6.72

0.42

72,131

Below Avg.

Small-Growth

Banks-Southeast

82 of 105

Risk Level

Type of Stock

Industry

Zacks Rank in Industry

ZACKS ESTIMATES

Shares Outstanding (mil)

Market Capitalization ($mil)

Short Interest Ratio (days)

Institutional Ownership (%)

Insider Ownership (%)

17

$502

54.09

62

32

Annual Cash Dividend

Dividend Yield (%)

$0.40

1.33

(in millions of $)

2004

2005

2006

2007

Q1

(Mar)

18 A

21 A

24 A

25 E

Q2

(Jun)

20 A

22 A

23 A

28 E

Q3

(Sep)

21 A

23 A

24 E

29 E

Q4

(Dec)

20 A

23 A

25 E

31 E

Year

(Dec)

79 A

88 A

96 E

114 E

Q4

(Dec)

$0.42 A

$0.50 A

$0.53 E

$0.65 E

Year

(Dec)

$1.56 A

$1.88 A

$1.99 E

$2.36 E

Earnings Per Share

5-Yr. Historical Growth Rates

Sales (%)

Earnings Per Share (%)

Dividend (%)

17.6

32.8

31.7

P/E using TTM EPS

P/E using 2006 Estimate

P/E using 2007 Estimate

15.4

15.1

12.7

Zacks Rank

Revenue

4

(EPS is operating earnings before non recurring items)

2004

2005

2006

2007

Q1

(Mar)

$0.36 A

$0.44 A

$0.50 A

$0.53 E

Q2

(Jun)

$0.38 A

$0.46 A

$0.47 A

$0.57 E

Q3

(Sep)

$0.40 A

$0.48 A

$0.49 E

$0.61 E

Zacks Projected EPS Growth Rate - Next 5 Years %

Consensus Projected EPS Growth - Next 5 Years %

? Copyright 2006, Zacks Investment Research. All Rights Reserved.

14

OVERVIEW

Headquartered in Little Rock, AR, Bank of the Ozarks, Inc. (OZRK) is the holding company for statechartered Bank of the Ozarks. OZRK provides a range of retail and commercial banking services

through 56 full-service offices in Arkansas and three in Texas, plus three loan production offices in

Arkansas and North Carolina. OZRK continues to grow primarily through a de novo branching strategy

which it initiated in 1994. Expansion plans for 2006 include a record 12 new offices. Management is

clearly focused on growth, but with an eye toward profitability.

OZRK operates a fairly traditional banking model, deriving most of its revenue (79% in 2005) from

spread-based sources. The loan portfolio is somewhat focused on real estate (82% at March 31), with

the balance made up primarily of commercial / industrial, agricultural and consumer loans. The securities

portfolio has been relatively steady at 25-30% of average earning assets in recent years (30% in Q2),

which is a bit higher than necessary in our view, and helps explain the company s high returns. Noninterest-bearing and other low-cost deposits funded 33% of average earning assets in Q2, with time

deposits and borrowing funding 51% and 18%, respectively. At June 30, OZRK had $2.4 billion in

assets, $1.6 Bn in loans and leases, and $1.8 Bn in deposits.

RECENT NEWS

OZRK announced 2nd quarter results on July 13. Net income was $7.9 million, or $0.47 per diluted share

(two cents better than our estimate and a penny ahead of consensus). The quarter was relatively solid in

our view, but not quite as strong as the headline implies. Management had seemed to imply previously

that expense growth would be high, and we had attempted to adjust our forecast accordingly. In the end,

though, both compensation and non-comp expenses were down sequentially, more in line with where we

had been previously. Much of this year s spending is discretionary and lumpy, based on new branches

and new hires. Our thinking at this time is that related spending has likely just been postponed, not

eliminated, and we expect expense growth in each of the next two quarters. As for revenue, net interest

income came in below our projections, rising only 1.7% sequentially, as a 7.4% increase in average loans

was significantly offset by a 23 bp decrease in the margin (to 3.61%). Non-interest income was basically

in line, as was the provision. Our near-term estimates are virtually unchanged at this time, while 07

figures are coming down slightly.

Tax-equivalent net interest income increased by 1.7% sequentially (6.8% year-on-year) to

$19.1 Mn, as 7.0% growth in average earning assets and a longer quarter were partially offset by

a 23 bp drop in net interest margin (to 3.61%). Further margin deterioration remains a possibility,

though the magnitude should be less than in recent quarters (although we said the same thing

last quarter). Average loans and leases grew a strong 7.4% sequentially following their weakest

quarterly showing in several years in Q1. Average deposits were up 9.3% sequentially (25.0%

year-on-year), including nearly 8.5% growth in low-cost deposits. ROA and ROE fell noticeably

on a GAAP basis, after last quarter s shortfalls were masked by huge securities gains. Credit

quality remained outstanding, with net charge-offs annualizing at 0.09% in Q2 (down 1 bp

sequentially) and non-performing loans checking in at 0.18% of total loans (down 6 bps). Capital

remained solid, though tangible equity took a bit of a nosedive, falling 63 bps sequentially 5.9% of

tangible assets. No detail was provided, but the culprit was most likely unrealized securities

losses (the portfolio remains large at 30% of average earning assets in Q2).

VALUATION

OZRK currently trades at 14.4 times the consensus forward estimate (versus 15.9x at the time of our last

full report), in line with the peer group median (vs. a 5% premium at that time). The premium is higher

Zacks Investment Research

Page 2



versus its southeastern peers, which have a lower expected growth rate (8.0% vs. 10%) and now trade at

a median of 13.8 times forward estimates (vs. 14.3 x in mid-April). On a price-to-book basis, the shares

trade at a 42% premium to the peer median, vs. a 61% premium previously.

Current pricing continues to look interesting on a P/E-to-growth (PEG) basis, using the consensus

forward estimate and our own long-term growth rate (no consensus LTGR is currently available).

OZRK s P/E-to-growth (PEG) ratio on this basis is 1.03, a 29% discount to the 1.45 median for the peer

group (vs. a 25% discount previously). On a price-to-book basis, however, the 42% premium looks fair

given an ROE 55% above median (and falling).

The quantitative Zacks Rank for OZRK is currently 4 (down from 3 on April 12), indicating some

likelihood for downward pressure on the shares over the near term. Short interest remains extremely

high at 54.1 days, though down from 59.5 days previously.

Industry Comparables (small-cap banks)

P/E using

trailing 12

mo EPS

P/E using 5 yr Avg Return on Return on

4 qtr Est trailing P/E

Equity

Assets

Price/

Book

OZRK

15.4

14.4

17.1

22.3

1.57

3.28

median

average

high

low

16.2

16.9

25.0

10.1

14.4

14.8

21.1

7.9

16.7

17.0

21.4

13.9

14.4

15.7

26.8

6.6

1.33

1.34

2.12

0.72

2.31

2.44

4.23

1.44

Next 3-5 Yr

Est EPS

Gr rate

Div Yield

1.3

10.0

11.3

18.5

6.0

2.0

2.0

4.9

-----

Our new $32 target assumes that the shares will trade at 3.34 projected book value six months out,

which also equates to 13.6 times our own forward estimate at that time. Combined the dividend, this

equates to a 7.3% expected total return over the period.

BULL STORY

OZRK remains a growth story among the banking universe, generating consistent growth in both revenue

and earnings in recent years. The majority of this growth has come from its de novo branching strategy

(embarked on in 1994). OZRK opened six new branches in 2005, expanded another, and replaced two

temporary facilities with permanent ones. Management intends to continue this strategy in 2006, adding

as many as 12 new offices (and replacing two more temporary facilities), three of which have been

opened year-to-date.

De novo branching is often an expensive way to grow, but OZRK has managed to grow tremendously in

recent years while improving the firm s cost structure at the same time, with the efficiency ratio reaching a

new record as recently as Q4. Management continues to reiterate its focus on profitable growth. This is

often a stated goal, but OZRK remains a fairly rare example of demonstrable success. ROA and ROE

remain well ahead of the peer medians, at roughly 1.55% and 22% over the last 12 months, respectively.

Both loan growth and deposit growth improved significantly in Q2, with average balances up 23.2% and

25%, respectively, year-over-year. As was noted on the Q4 call, deposit strategy has turned more

aggressive, and we might expect deposit growth rates in the mid-teens to low 20s (matching their general

expectation for loan growth), with some related pressure on the margin. Variable rate loans remain a

growing component of OZRK s portfolio, continuing to improve its rate positioning at the margin. Credit

quality remains solid, with non-performing loans representing 0.18% of total loans at June 30, and an

allowance equating to 5.5 times NPAs and 1.12% of total loans.

Zacks Investment Research

Page 3



BEAR STORY

We believe that P/B generally acts as a constraining factor for the shares (typically among the highest

P/B of all the small-cap banks we track), which could easily trade higher on a PEG basis. Given the

lower ROE in Q2 and probably throughout 2006, we think that the decline in P/B was justified, though we

expect it to be more stable going forward.

Margin compression also remains a concern (for all the banks) in the near future. Compression

continued in Q2, exceeding even the magnitude of the Q1 decline, with NIM falling another 23 bps

sequentially to 3.61%. The primary culprit was again management s deposit initiative, as a number of

deposit products were re-priced in late January. A flat yield curve and stiff competition certainly did not

help. Further margin deterioration remains a possibility, though the magnitude should be less than in

recent quarters (although we said the same thing last quarter).

Concentration risk is also significant to OZRK. One example of this is in credit risk. OZRK saw

significant deterioration in credit quality in late 2004 (with non-performing loans more than doubling as a

percent of total loans during the course of one quarter) on the back of a single credit relationship. While

not indicative of a downward trend, it highlights an aspect of concentration risk that exists in smaller

institutions. OZRK faces other forms of concentration risk, in our view, with 80% of revenue from net

interest income, 80% of loans based on real estate, and 95% of branches in Arkansas.

PROJECTED INCOME STATEMENT & BALANCE SHEET

Bank of the Ozarks, Inc.

Income Statement and Balance Sheet

(Dollars in millions, except EPS data)

Net interest income

Non-interest income

Net revenue (not FTE)

Loan loss provisions

Non-interest expense

Income taxes & other

Zacks adjusted income

before NRI

GAAP net income

Diluted EPS before NRI

Reported EPS

Loans & leases

Investment securities

Total assets

Deposits

Other liabilities

Shareholders' equity

Zacks Investment Research

12/02

40

12

52

4

25

9

12/03

49

17

66

4

32

10

12/04

61

18

79

3

38

12

12/05

69

19

88

2

40

14

12/06 E

74

22

96

3

45

15

12/07 E

90

23

114

5

51

18

14

14

0.92

0.92

20

20

1.24

1.24

26

26

1.56

1.56

31

31

1.88

1.88

34

34

1.99

1.99

40

40

2.36

2.36

718

232

1,036

790

173

73

909

364

1,387

1,062

226

98

1,135

435

1,727

1,380

226

121

1,371

574

2,135

1,592

394

149

1,730

740

2,710

2,050

500

160

2,080

910

3,270

2,540

540

190

Page 4



HISTORICAL ZACKS RECOMMENDATIONS

DISCLOSURES

The analysts contributing to this report do not hold any shares of OZRK. Zacks EPS and revenue forecasts are not consensus

forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal

views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly,

related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this

report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to

accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet

the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an

offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a

position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the

securities it covers. Buy- Zacks expects that the subject company will outperform the broader U.S. equity market over the next one to two

quarters. Hold- Zacks expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. SellZacks expects the company will under perform the broader U.S. Equity market over the next one to two quarters. The current distribution of

Zacks Ratings is as follows on the 1128 companies covered: Buy- 21.5%, Hold- 73.9%, Sell 4.5%. Data is as of midnight on the business day

immediately prior to this publication.

Zacks Investment Research

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