I am big fan of Bank of the Ozarks (Nasdaq:OZRK), so it bothers me that I can't find much value in these shares. Moreover, while I believe this company's aggressive growth strategy could underpin its evolution into a significant regional bank, I do worry that the bank is doing too much too soon. While it certainly makes sense to grow aggressively while many larger competitors have a hand tied behind their back, aggressive growth stories in banking have a disturbing habit of going sour at some point.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Challenges Seem to Be Intensifying
While there are certainly regional differences in business conditions in the U.S., the fact remains that Bank of the Ozarks operates in the same low-rate/narrow spread environment as First Horizon (NYSE:FHN), Cullen/Frost (NYSE:CFR), and Regions Financial (NYSE:RF). To wit, it's a lot harder to make a buck in regular old banking.

Bank of the Ozarks saw net interest income fall almost 4% sequentially, as the company saw a roughly 1% sequential decline in earning assets and a 14 basis points decline in net interest margin. While OZRK's 5.84% net interest margin is a whopper when compared to the likes of Bank Of America (NYSE:BAC) or other large banks, investors should remember that that is a byproduct of the company's focus on commercial real estate lending and large covered loan position.

SEE: 7 Steps To A Hot Commercial Real Estate Deal

Non-interest income made up for some of the shortfall in interest income, though, as this rose nearly 14% sequentially. The bank also saw very good expense control and a pretty remarkable non-performing loan and net charge-off performance, whether you include or exclude the covered loans.

A Few Areas of Concern
While Bank of the Ozarks once again beat consensus earnings expectations, I am a little concerned about some parts of the bank's balance sheet. Loan growth (excluding covered loans) was feeble, and it looked as though it grew just 1% on an average balance basis. At the same time, the company's deposits are shrinking (down about 4% sequentially).

To be sure, there's a question of balance here. There is quite a bit more competition out there for creditworthy borrowers and the bank is likely facing pressure to accept lower rates and/or underwriting standards. At the same time, letting unattractively priced acquired deposits walk away is not the worst thing in the world if management can't find attractive uses for the capital. After all, capital really isn't the problem here.

SEE: What Credit Score Should You Have?

Speaking of capital, that brings me to my other concern about this business. Bank of the Ozarks has been very active in participating in FDIC-assisted acquisitions, and it looks like management would like to do more if the prices are right. I definitely understand that these deals can represent rare cost-effective means of expansion, but I also do believe that there are significant risks in a bank expanding faster than its systems can handle. Now, there's nothing in the company's expense ratio or bad debt lines to suggest that's a problem, but it is one of the issues that management has to consider.

The Bottom Line
As I said, I'm a big fan of this bank and the growth that the company has delivered over the past decade is nothing short of remarkable. What's more, this is a bank with a clearly defined purpose and philosophy, and has usually been willing to sacrifice growth instead of standards when the two oppose each other. It also doesn't hurt in the least that Bank of the Ozarks has targeted a part of the country that has been experiencing above-average population growth.

SEE: The Banking Industry In 2012

All of that said, it still comes down to a "right stock, right price" calculation, and this is where things don't look as good for Bank of the Ozarks. Even with the assumption of high-teens return on equity on a sustained basis, the stock is more than 10% above fair value. As a result, I will continue to admire these shares from the sidelines.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!