Inside Wall Street: A Small Bank Thriving in a Weak Economy

Even now, many large-cap banks remain under a cloud of suspicion after the massive government bailouts they received during the financial crisis. Smaller regional and community banks are faring far better, and increasingly, Wall Street is giving them favorable attention. And with good reason: Shares of some pint-sized banks are outperforming their larger rivals.

Admittedly, these small-to-mid cap financial companies are far from household names. But they are getting more respect than their larger peers.

One such little-known bank that's catching the eye of investors is Bank of the Ozarks (OZRK), based in Little Rock, Ark. It has total assets of $32 billion and 86 offices, including 65 banking units in 34 communities located in Arkansas, Texas, North Carolina, South Carolina, Georgia and Alabama.

Finding Opportunities in the Recession

True, many of the small regional banks have been battered by the recession, and not a few have resorted to filing for bankruptcy protection. But Ozarks is one of the few small banks that have been able to buy some of the failed banks because of its solid balance sheet and its management's growth strategy.

"Bank of the Ozarks has embarked on an opportunistic expansion plan, with assistance from the FDIC, which should provide multiple opportunities to widen its reach," says Matt Olney, analyst at investment firm Stephens, which owns shares and rates the stock as overweight.

The analyst expects that in two years, more than 100 other banks with assets of about $50 billion could go under. But that's what Ozarks is counting on to expand its footprint.

Ozarks has prepared and repositioned its balance sheet to acquire several troubled banks and plans to add $1.2 billion to $2 billion to its assets through acquisitions, notes Olney. Already, the bank has acquired two such failed banks, including Woodlands Bank of Bluffton, SC, with assets of $390 million and operations in eight states. The analyst believes the acquisitions will be accretive to 2011 earnings.

Boosting Earnings

Olney says that because of Ozarks' projected acquisitions and strong organic growth, he has boosted his 2012 earnings forecasts for the bank to $3.11 a share from $3, and figures the stock will run up to $45 a share. The stock has been one of the hottest in the regional bank industry, hitting a 52-week high of $39.78 in early August 2010, up from a 52-week low of $22.

Currently trading close to its 52-week high, Olney argues that the stock is still undervalued based not only on its strong earnings growth of about 19% annually but on the potential upside from its future acquisitions.

Indeed, Ozarks has additional capacity to do more deals. "Over the next two years, we expect Ozarks to become a $4 billion to $6 billion bank in assets through a combination of organic growth and its FDIC-assisted acquisitions of other banks," says Kevin Reynolds, analyst at Wunderlich Securities, who rates the stock a buy with a 12-month target of $45 a share.

One other bullish factor for Ozarks: Some 18% of the stock is held by the shorts who predict the bank will fail. So far, however, the bulls appear to have the upper hand. "Sooner or later, the shorts have to admit defeat," says Reynolds. When they do and when they cover their shorts, the stock will have to climb some more.

In the meantime, some of the large institutional investors who own shares are holding on to the stock, including Jennison Associates, which holds a 7% stake; Vanguard Group with 5%; and investment bank giant Goldman Sachs, with 3.22%.