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Jim Cramer compared Hudson City Bancorp (HCBK) to Bailey Bros. Building & Loan featured in the movie It’s a Wonderful Life. He should have looked further south for a more apt match and chosen Bank of the Ozarks (OZRK), a truly impressive bank based in Arkansas that has been taking the South by storm. I've looked at a host of great regional banks, First Citizens BancShares (FCNCA), Home BancShares (HOMB), Umpqua Holdings (UMPQ), New York Community Bancorp (NYB), BB&T (BBT), and Valley National Bancorp (VLY) in a series of articles (here, here, and here). None holds a candle to OZRK.

The company's CEO, George Gleason, has catapulted Bank of the Ozarks into a significant regional bank with over $3 billion in assets. It's a remarkable story when you consider that in 1979, Mr. Gleason-- then aged 25-- bought a controlling interest in the bank, an entity holding only $28 million in assets at the time. Through a series of acquisitions and bank expansion, OZRK has grown to 114 offices throughout Arkansas, Texas, Georgia, North and South Carolina, Alabama and Florida.

Recently, the bank has been acquiring failed banks from the FDIC. The transactions are advantageous: the FDIC guarantees at least 80% of the losses on each loan, the acquirer makes favorable net interest margin spreads (OZRK has a whopping NIM of 5.61% due in large part due to these covered loans), and OZRK expands at little cost. OZRK has funded most of these acquisitions with money made with through the bargain gains made by the deals themselves. The company hasn't issued a single share fund growth: it's still the same 17 million shares unchanged since 2006. With each transaction, OZRK has actually gotten stronger. Per SEC filings:

"The Company’s ratio of common stockholders’ equity to total assets was 10.06% as of March 31, 2011 compared to 9.39% as of March 31, 2010. Its ratio of tangible common stockholders’ equity to tangible total assets was 9.84% as of March 31, 2011 compared to 9.17% as of March 31, 2010."

OZRK was careful underwriting loans: only 0.77% of loans are nonperforming. The bank greatly increased its dividends: OZRK has boosted its dividend 3 times in the last 3 quarters. It has almost doubled its dividend since 2006.

Mr. Gleason, in his conference call, promised that the bank would acquire more failed institutions. Good for his word, OZRK won two more banks. On Friday OZRK became the owner of two Georgia banks, Park Avenue Bank and First Choice County Bank of Dallas, together amounting to $1.07 billion in loan and other assets. Remember OZRK houses $3.5 billion in assets, so this is an ambitious undertaking, especially coming on top of five other FDIC assisted acquisitions since March 2010. Apart from U.S. Bancorp, the bank holds the record for doing FDIC assisted transactions. OZRK expects the acquisitions to be immediately accretive to earnings and book value.

Current covered loans in house have been delivering about 8.4% interest, the key behind OZRK's high 5.61% net interest margins. For a spread bank, OZRK is head and shoulders above the rest. Most are under 3.3%. Should the $1 billion in newly acquired loans generate anywhere near that rate, OZRK may be adding 50% of income to its business. Mr. Gleason says he's prepared for many more FDIC deals without issuing a single share. I believe him, and I am targeting a $64 share price based on more FDIC acquisitions and inexpensive growth.


Disclosure: I am long OZRK.

Source: Bank of the Ozarks: King of the Regional Banks