Bank of the Ozarks and the other man from Little Rock
One of the perks of being a fund manager is that sometimes you meet remarkable entrepreneurs who are building businesses from the strength of their strategic vision and relentless purposefulness.
This is especially true if you are willing to invest in companies as small as US$400m in market capitalisation, as we are. When you can climb on board these companies even in their ‘middle age’ their share prices can compound wonderfully for many years.
Several years ago we travelled to Little Rock, Arkansas, home of Bill Clinton, to meet a man called George Gleason who runs the most successful US bank you will never have heard of, Bank of the Ozarks (OZRK). OZRK’s shares have been in the Morphic portfolio for much of our Fund’s life.
The story we attach here, courtesy of US website MicroCapClub, tells the incredible 30 year OZRK growth story under Gleason’s leadership.
Since listing on the stock market in the late 1990s, OZRK’s stock price has compounded at 20% per year, and outperformed the overall US market by 15% per year. This is all the more creditable, given that over the same time, the US banking index has returned zero.
In this time it has spread its wings from one of the poorest parts of one of the poorest states in the US to become a significant player throughout the American South.
OZRK’s success is even more remarkable when you consider that for more than a decade, its major business has been as a speciality lender to property developers.
Many people are sceptical about how a small bank headquartered in what is still a relative backwater could succeed in this business. This includes Muddy Waters, the San Francisco based short-selling firm lead by Canadian Carson Block. We respect Block’s track record, but believe OZRK’s performance during the GFC, when it had minimal bad loans, gives credibility to its claims to a strong risk culture. OZRK attributes its growth with immaterial losses since then, despite maintaining above average pricing and tightening lending standards, to an ability to cherry pick good customers willing to pay up for streamlined decision making.
Some investors are also nervous about OZRK’s capacity to manage the growth it is achieving through takeovers, including two relatively large ones consummated this year. We acknowledge the risks in this, but also take comfort from the fact that OZRK has conducted more than a dozen mergers in the last decade, all of which seem to have added value.
We are not that excited about the US banking sector at present, but we believe that OZRK will continue to do much better than the average, so we use the flexibility of our long-short strategy to hedge out the industry and country risk by holding a matching short interest in the US banking industry ETF.
We hope you enjoy the inspiring story of how one man’s vision – and his ability to build a strong team – has built this impressive institution from such an unlikely base.