It's undeniable that Bank of the Ozarks (NASDAQ:OZK) is one of the best and most profitable regional banks in the U.S., but shares are right now being valued at over three times tangible book value when most others are at only half of that; a thought that resonates even more when coupled with the fact that management has been regularly selling shares over the last six months. The quality is there, but anyone looking to add is going to have to pay a very high premium, but then again, this bank rarely trades for anything less.
What more could you ask for?
Bank of the Ozarks has earned its premium price tag by outperforming everyone else. Net interest margins "fell" this last quarter, but even then they came in at 5.56%. To be honest, I'm not familiar with every regional bank, but this is miles above the average. And, considering that interest rates are starting to firm up, a lead as large as Ozarks has makes it almost impossible for any other regional to close the gap.
Share price aside, the bank is growing at a ridiculous pace and loans alone were turned in up 23.5% from the same time last year (excluding purchased and covered loans). In a time where most banks are operating with a very low loan/deposit ratio, Ozarks' is right at 100% and one could argue that they are actually on the verge of a deposit shortage. Over 100% isn't too much to worry about but it does imply that the non-deposit funding that would be required has the potential to cut into margins because deposits are a bank's cheapest source of funding.
To put this into context, Wells Fargo's (NYSE:WFC) core loan/deposit ratio was last reported 15% lower than Bank of the Ozarks' at approximately 85%. At 85%, Wells Fargo is far from needing deposits to fund loan growth which is something that has helped the bank pay down some of its other more expensive liabilities-another way to improve margins. Since 2008, Wells Fargo's long-term and short-term borrowings (non-deposit funding) have been reduced by 50.8% to $184.5 billion. Wells Fargo's NIM has been significantly pressured during that time (down to 3.46% last quarter) but unburdening these more expensive credit lines was necessary and will make for an easier rebound. Wells Fargo currently trades at a price to tangible book value of 2.05.
Even though Bank of the Ozarks' deposit growth has been slow, non-interest bearing deposits are up 17.75% from the same time last year and now account for 17% of the company's total liabilities. Wouldn't you like 17% of your loans to be for free? With this advantage, the bank is able to operate with a very low efficiency ratio which helps maximize returns. Another regional to watch for with an absurd amount of non-interest bearing deposits is Texas based Prosperity Bancshares (NYSE:PB). When last reported, Prosperity's non-interest bearing deposits accounted for 26% of all deposits and 25.8% of the bank's total liability account. Prosperity has been growing through acquisitions, much like Ozarks, but it has yet to realize the full benefit of its large deposit base because only 50% of them have found loans to finance. Prosperity Bancshares last turned in a NIM of 3.43% and currently trades at a very high 3.72 times its tangible book value of $16.05 per share.
Going forward, it's hard for say but I imagine the only thing investors could wish from Bank of the Ozarks is more of the same. Nonperforming assets are up to 1.2% of total loans and leases but even so, this is relatively low and the bank's allowance account has them almost covered two times over. It appears that Ozark's looks to keep allowances at close to 2% of total loans but, being that the loan portfolio is growing and net charge-offs are declining, the company looks due for a lower provision charge-something that could boost up the bottom line even more.
I'm patiently waiting for a significant pullback before I pull the trigger but then again I've been waiting for some time. The bank is doing absolutely everything right and at the pace the company is growing it would almost be desirable for the company to suspend its dividend payment. I know that's an absurd thought but why wouldn't you want to keep that money in-house, it would be growing at an annual rate in the high teens for what looks to be a very very long-time!