Fastball Financial

For obvious reasons, the banks have had their ups and downs over the past decade.  However, not all banks had a roller-coaster operational ride during that time.  Some banks performed just fine with a conservative business models that delivered consistent returns.  Take Bank of the Ozarks (OZRK), which owns around 100 offices based in Arkansas and various surrounding states.  They have produced record earnings for the past 11 years and have a long history of dividend increases, including 8 of the 9 past quarters.  OZRK doesn’t do anything fancy.  They just run banks well and grow steadily.  However, over the past few years, their excellent standing has provided them an opportunity to grow rapidly in a relatively low-risk manner.

FDIC Assisted Acquisitions

Historically, Bank of the Ozarks has focused on organic growth a steady pace, preferring to let good operations drive much of the consistent growth.  Now, because of the financial crisis, Bank of the Ozarks has the opportunity to acquire failed banks at relatively little cost.  When banks fail to remain in good standing, the FDIC (Federal Deposit Insurance Corporation) takes action.  The failing bank is closed and its assets are given to a bank whose balance sheet and operations are strong.  What’s more, the acquiring bank not only gets the assets of the failed banks, but the FDIC will also share in much of the losses that the failed bank produces.  The exact details of the FDIC loss share can be found in Bank of the Ozarks’ 10-K filing, but in very simple terms the FDIC will take roughly 80% of any losses incurred on assets transferred to Bank of the Ozarks.

In 2011, Bank of the Ozarks earned $36 million from FDIC assisted acquisitions.  That means core earnings were only $65 million, a 1.5% increase from 2010.  FDIC assisted acquisitions will continue to be the focus for Bank of the Ozarks for the next couple years.  They provided a range of acquisition estimates for 2012, but an assumption of around 10 acquisitions is fair based upon the ranges management provided.  Management also indicated that they believe the FDIC assistance acquisition process will continue through 2014 because the FDIC is moving slowing.  That is three more years of potential outsized growth for Bank of the Ozarks.  To give some perspective on what that means, consider that their 2011 profit was 77% higher than in 2009, which was before it started the FDIC acquisitions.

Risks

The biggest risk of investing in any bank right now is that the financial sector as a whole struggles and brings down the entire neighborhood of banking-related stocks.  That potential remains but is decreasing over time as more banks (especially the conservative ones) show that they are well positioned for future growth despite the challenges that remain.

On an individual stock level, the most important risk to evaluate is non-performing assets.  In Bank of the Ozarks’ case, excluding FDIC covered loans:

• Nonperforming loans and leases as a percent of total loans and leases decreased to 0.70% as of year-end 2011 compared to 0.75% as of year-end 2010.
• Nonperforming assets as a percent of total assets decreased to 1.17% as of year-end 2011 compared to 1.72% as of year-end 2010.
• The ratio of loans and leases past due 30 days or more to total loans and leases decreased to 1.56% as of December 31, 2011, compared to 2.02% as of year-end 2010.

All of those rates are tremendously low and are indicative of how well positioned Bank of the Ozarks is to manage their business without worrying about how much of their current balance sheet will go bad.

Icing on the Cake

If the growth itself isn’t enough for you, how about a projected 6% net interest margin for 2012?  Bank of the Ozarks management itself likes to celebrate this fact, and they should.  That is a sign of excellent management of its assets.  Net interest margin is the difference between what yield the bank earns on its assets and the interest that the bank pays out on deposits and other funding sources.  Let’s look at how that compares to some of Bank of the Ozarks’ competitors:

• Regions Financial (RF) operates approximately 1,700 banks, mostly in the Southern U.S.  Regions has yet to recover at all from the 2008 sell-off.  Back in 2007, Regions’ stock could be found in the $30s.  Now, it is struggling to get back up to $7.  Regions expanded its net interest margin in 2011 up to 3.1% from 2.9% in 2010.
• Sun Trust Banks (STI) operates approximately 1,700 banks, primarily in the Southeastern U.S.  Sun Trust also has yet to recover at all from the 2008 sell-off.  Back in 2007, Sun Trust’s stock was up around $90.  Lately, it has been hanging out in the low $20s.  Sun Trust grew its net interest margin in 2011 up to 3.5% from 3.4% in 2010.
• BB&T (BBT) operates approximately 1,800 banks, in both the Eastern and Southern U.S.  BB&T stock has held up relatively well over the past several years.  It’s currently up over the $30 mark, but was up around $40 before the 2008 market sell-off.  BB&T held its net interest margin at around 4% in 2011.  Not bad at all, plus BB&T offers a 2.6% dividend.

While these companies are much larger that Bank of the Ozarks, we can see that Bank of the Ozarks is getting more out of each dollar of its operations.  All the while, its stock has doubled over the past 5 years.

Why else to I like Bank of the Ozarks?  The company currently has a 1.6% dividend that will pay you while you wait for the growth.  All-in-all, this is very likely to be a great entry point in Bank of the Ozarks’ stock.  They already have a history of consistently stellar results.  Now they have a relatively low-risk growth driver for the next couple years.