Why This Bank Is Among the Best of the Breed

Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's time again to review one of my favorite and easiest stocks to recommend: Bank of the Ozarks (NASDAQ: OZRK). Bank of the Ozarks operates just over 100 banks in the southern U.S., primarily in Arkansas and Georgia. This stock has been a model of consistency and market outperformance. Even when the market got smacked in 2008 and early 2009, Bank of the Ozarks barely budged. Since then, the stock has rocketed higher.

<img alt="" src="http://media.ycharts.com/charts/67e7640425e5d8649fb869f8a603f181.png" />

What has driven the big rally since the beginning of 2010? Extra growth, mostly in the form of cheap acquisitions handed to them by the FDIC. Historically, Bank of the Ozarks has focused on organic growth at a steady pace, preferring to let good operations drive much of the consistent growth. Now, because of the past 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.

These FDIC acquisitions have started to slow and management is not counting on these acquisitions for their success, but any new FDIC acquisitions will be icing on the cake. Bank of the Ozarks has also turned to acquiring a few small "live" banks (i.e. banks that have not failed and been taken over by the FDIC). Even without these acquisitions though, Bank of the Ozarks has plenty of organic growth ahead of it, as it always has.

Net Interest Margin

What sets Bank of the Ozarks apart from other banks is their net interest margin. 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. For the first quarter of 2013, which was just reported, the company had a 5.83% net interest margin. That's astounding! And it's not a one-time occurrence. In fact, that's down from the 6% margin in 2012, but excellent nonetheless.

For comparison purposes, let's take a look at some similar companies:

  • Regions Financial (NYSE: RF) operates approximately 1,700 banks, mostly in the Southern U.S. It's net interest margin in Q4 2012 was 3.08%.
  • KeyCorp (NYSE: KEY), based in Ohio, operates across 14 states. It's net interest margin for Q1 2013 was 3.24%.
  • BB&T (NYSE: BBT) operates approximately 1,800 banks, in both the Eastern and Southern U.S. It's net interest margin for Q1 2013 was 3.76%.

Clearly, Bank of the Ozarks' net interest margin stands head-and-shoulders above similar companies. BB&T is pulling in a solid 3.76%, but still cannot come close to Bank of the Ozarks at 5.83%.

For some perspective on how Bank of the Ozarks' 5.83% net interest margin compares to the industry, the graph below shows net interest margins of all U.S. Banks courtesy of the St. Louis Fed.

<img alt="" height="378" src="http://fastballfinancial.com/wp-content/uploads/2013/04/USNIM_Max_630_378.png" width="630" />

Dividends

Bank of the Ozarks provides its investors with a steady 1.6% dividend yield. That's nothing amazing, but it's a solid dividend yield that provides extra income while investors enjoy the stock's ride higher. For comparison purposes, here are the dividend yields of the other aforementioned companies:

  • Regions = 0.5%
  • KeyCorp = 2.1%
  • BB&T = 3.1%

So, Bank of the Ozarks comes out somewhere in the middle of its competitors on dividend yield. Not super, but not bad. If you're going purely for yield, BB&T is the best way to go in this group. BB&T also provides some additional stability with its larger market cap of $21 billion.  

However, I'd rather go for the total return that Bank of the Ozarks should continue to provide. Looking at Regions and KeyCorp, we need to see some growth drivers, otherwise there isn't much hope for investing in these stocks other than a potential buy-out. Cost cutting only gets you so far.

Results

As you can see from the chart below, Bank of the Ozarks has been the All-Star over the past five years. BB&T has held its ground, but still hasn't produced any long-term gains for investors. Regions and KeyCorp have yet to recover from the 2008 beating.

<img alt="" src="http://media.ycharts.com/charts/28394db648dc481d7a1f62cec0084ce7.png" />

Bottom Line

There are plenty of banks to invest in. Some are national, some are international, and other are regional. Regardless of the size and geography, investors should always look for a history of consistency and execution, in good times and in bad. Bank of the Ozarks gives you exactly that. Regardless of what's happening in the economy, Bank of the Ozarks has weathered the storm and let its investors sleep at night. That's why it was part of my 10 Stock Portfolio for 2013. This is a great long-term stock to own.


Dave Zaegel owns shares of Bank of the Ozarks. The Motley Fool owns shares of KeyCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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