3 Reasons Why You Simply Cannot Ignore Bank Of the Ozarks, Inc.

Bank of The Ozarks has a lot going for itself and convinces investors with a variety of metrics that justify its premium valuation.

Jul 15, 2014 at 1:24PM
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Source: Company

Bank of the Ozarks, Inc. (NASDAQ:OZRK) sounds like some place from the Lord of the Rings movies, but let me assure you: The bank is as real as it is outperforming.

The community company not only has a unique name, but also a history of achieving a series of record years as measured by its net income.

Bank of the Ozarks had a fairly stable net income during one of the most severe recessions since the Great Depression and regularly achieves high returns on assets while pursuing a well-balanced community banking model since it was founded in 1903 in Jasper, Arkansas.

1. Strong profitability record despite devastating financial crisis
To some investors it might sound peculiar, but many community banks have mastered the financial crisis much better than traditional Wall Street institutions with investment banking divisions.

Community banks pursue relationship-centered business models and are deeply ingrained in local communities. Bank of the Ozarks, for instance, was founded in 1903 which gives the bank a competitive advantage in terms of relationships with local businesses and customers.

Bank of the Ozarks also builds on a successful expansion strategy to drive earnings in states like Texas, Georgia, North Carolina, South Carolina, Florida and Alabama.

And the record proves Bank of the Ozarks right, achieving one record year after another.

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Source: Bank of the Ozarks Investor Presentation May 2014

Bank of the Ozarks' net income has substantially increased from just $4.5 million in 1997 -- the year of its IPO -- to more than a $100 million in 2011. High earnings growth rates subsided during the boom in the housing market from 2005-2007 indicating solid risk management and a focus on core banking operations such as lending and raking in deposits.

The bank has pretty much weathered the financial crisis without much harm to its bottom line: Not many banks can present such a track record.

2. Peer group-leading profitability
The consistent increase in net income already suggests high levels of profitability at this regional bank with a market capitalization of $2.6 billion.

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Source: Bank of the Ozarks Investor Presentation May 2014

Looking at Bank of the Ozarks' historical return of average assets (ROAA), the bank makes an extremely convincing case.

In 2008 and in 2009, Bank of the Ozarks exhibited a ROAA of 1.14% and 1.23% respectively, hugely differentiating itself from other banking institutions and the big Wall Street operations.

Over the last eight financial years, Bank of the Ozarks achieved an average ROAA of 1.73% which is a respectable metric considering that the financial crisis was in full force and devastating to the financial sector.

3. Superb efficiency ratios
When it comes to the evaluation of a bank's cost structure, the efficiency ratio is usually a tell-all sign.

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Source: Bank of the Ozarks Investor Presentation May 2014

The efficiency ratio allows investors to judge how efficiently a bank is running its operations.

Bank of the Ozarks achieved a 2013 efficiency ratio of just 46% indicating it costs the bank $0.46 (not including interest expenses) to generate one dollar of revenue.

More importantly, Bank of the Ozarks convinces with a consistently lower efficiency ratio compared to its peers.

The Federal Deposit Insurance Corporation, for instance, calculates the efficiency ratios of all banking institutions that benefit from a FDIC guarantee.

FDIC-insured banking institutions had an average efficiency ratio of 60.5% in fiscal year 2013, hugely lagging the 46% of Bank of the Ozarks.

Valuation
With this kind of track record, it comes as no surprise that investors pay a hefty premium for Bank of the Ozarks' equity.

Bank of the Ozarks currently trades at a price to book value of 3.73 and a price to tangible book value of 3.85.

This premium is rightly deserved given Bank of the Ozarks' extraordinary growth record, high profitability and tight grip on its banking operations.

The Foolish Bottom Line
You don't always have to buy banks everybody knows about. Oftentimes, the less visible, lesser known community banks are interesting investment candidates precisely because most people chase popular, well-known names.

With a history of outperforming in terrible economic conditions, consistently high profitability and efficient bank operations, Bank of the Ozarks is a true gem that has much more potential to deliver value for shareholders.

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Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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