A Late Look At Bank Of The Ozarks

Bank of the Ozarks (Nasdaq: OZRK) is one of those companies I have followed for a long time, and liked for a long time, but never actually owned in my portfolio. Once again, the company delivered the sort of financial results that keep this one on my watchlist.

Once again, the company reported earnings that were well above the average published estimates. Keep in mind, though, that acquisition accounting makes that comparison almost completely opaque. Still, earnings were up more than 14%, and the annualized ROE of over 15% was a nice result.

Continuing a trend across the banking sector, lending activity was feeble. Loans were down about 5% on an annual basis, though ticked up 1% sequentially. Now, the company claimed that loan activity was weak for lack of demand. Without meaning to assail management's integrity, I would suggest that is part of the reason. I think what management really means (but will not say openly) is that there is a lack of demand among the pool of potential borrowers that constitute acceptable credit risk. Time and time again, I keep seeing surveys suggesting that small business owners cannot get the loans they need to start or expand business ... so, I think the demand is there, but I think banks like Ozarks is being careful about who they underwrite.

Balancing the lending activity, deposits were up 1% annually and down 4% sequentially. Moreover, the character of those deposits have continued to change in the company's favor - the company now has considerably less CDs outstanding and very little in the way of brokered deposits.  That has helped keep the cost of funds quite attractive, and the company's net interest margin was a very healthy 5.1% (up from 4.8% last year).

Credit quality also improved - NPLs were down, there were fewer loans past due, and the company set aside less in anticipation of future bad loans. Given that Ozarks never over-indulged in crappy lending to the extent of many other banks, their balance sheet never got so terrible. Still, improvement is improvement...

Ozarks is a good example of what I like to see these days ... though I wish they were increasing their lending more. There is nothing wrong with getting dirt-cheap money from depositors and re-investing that in securities and profiting from the spread, but that game will eventually come to an end when rates begin to rise.

Right now, I am not interested in the stock. I think the stock is worth about $35, but maybe up to $39.50 with some aggressive assumptions. Either way, that is not enough to entice me at today's prices.