Bank Of The Ozarks Making The Best Of Things

By Stephen D. Simpson, CFA | April 14, 2011 AAA

No bank has gone through the housing crash and credit crisis totally unscathed, but it clearly has not harmed all banks to the same degree. Although government-mandated changes to key aspects of the banking industry like capital requirements, lending standards and fee income will alter the profitability of banks going forward, some banks have been able to use the crisis to expand and gather assets. (To read more about how banking has changed, see The Evolution Of Banking.)

TUTORIAL: Banking

Bank of the Ozarks (Nasdaq:OZRK) was a very interesting small-cap bank before the crisis, but a combination of savvy management and FDIC-assisted acquisitions have left the company in good shape for the coming years.

Solid-Looking Numbers for Q1
Bank of the Ozarks has profited from the oxymoronic policy of aggressive conservatism. That in turn has led to unusually low credit losses and non-performing assets, as well as surprisingly high net interest margin. At the same time, it is hard to ignore that the bank's performance has been boosted by the contributions of acquired businesses.

For the first quarter, OZRK saw fully-taxed net interest income rise about 33% on an annual basis (to $36.1 million). On that basis, net interest margin rose to 5.61% from 4.99% - a level that is well above the norm and even high-end performers like Westamerica Bancorp (Nasdaq:WABC), BankUnited (NYSE:BKU) and First Republic Bank (NYSE:FRU).

Along the way, the company did see higher operating expenses, but that is not entirely unexpected from a bank integrating several acquisitions and looking to expand its own operations. On a more encouraging note, credit continued to improve - non-performing loans ticked up a bit from the fourth quarter but remain at an attractive level overall (or at least attractive relative to most other banks). (For more on banks from that area, see Arkansas Regional Is Banking On Growth.)

A Bank with New Footholds for the Future
On one hand, the multiple FDIC-assisted deals that OZRK has done has given the bank a lot of branches, customers and deposits at a very attractive price (with the FDIC covering a lot of the potential bad loans). Generally speaking, buying assets for less than they worth is a winning strategy.

On the other hand, acquisitions are challenging enough in their own right and buying distressed banks can be even more challenging as these companies often cut corners leading up to their failures. Add to that the general complications and headaches of integrating payroll systems, IT systems and so on, and it is a lot for a relatively small company to take on at once.

Long term, the deals make sense. OZRK has shown that it can be competitive through its own organic efforts; growing to become one of the largest banks in Arkansas, even while competing with Regions (NYSE:RF), Bank of America (NYSE:BAC) and BancorpSouth (NYSE:BXS). Getting footholds in states like Georgia, Texas, Alabama, Florida and the Carolinas, then, could be a good base for future organic expansion. (To read more on smaller banks, check out Small Banks Cast A Wide Net.)

The Bottom Line
Unfortunately for value hounds, the quality of Bank of the Ozarks is no great secret in the market. If the company can get back to returns on equity in the 20% range, the stock may be worth a price in the low $50s, but that is not tremendous upside potential. This would be a fine bank to buy on a market pullback or a missed quarter, but for now it's mostly a watchlist candidate. (For more on banks, check out Who Will Make The Bank "Death Watch" List?)

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