1 Fascinating Secret of the Top-Performing Bank of the Decade

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Photo credit: OakleyOriginals.

Bank of America's  stock lost around 60% of its value over the past decade. Obviously, it's not the bank I'm referring to in the headline. Not that Bank of America was alone -- plenty of banks performed worse, and many simply failed.

Wells Fargo  could have been the answer if we were talking about the biggest banks in the country. And fellow Warren Buffett banking favorite U.S. Bancorp  wasn't too far behind Wells.

But both of those banks were clobbered by Bank of the Ozarks .

OZRK data by YCharts.

It's understandable -- if not reasonable -- that in recent years, the financial media has been obsessed by what makes a bank fail. What's received a lot less attention is a bank's path to success. Sure, lots of banks proved to be abject disasters during the financial crisis, but I find it even more fascinating that a small, lesser-known bank like Bank of the Ozarks not only survived, but thrived in the shadow of the meltdown.

Between year-end 2003 and the third quarter of this year, Bank of the Ozarks' assets expanded from $1.4 billion to $4.7 billion. Over the same period, earnings jumped from $20 million to more than $80 million.

The earnings of Bank of America ($8.7 billion over the past 12 months) and Wells Fargo ($21 billion) are orders of magnitude larger than Bank of the Ozarks', but the disparity in growth -- particularly on a share-adjusted basis -- is huge.

Bank of the Ozark's small size helped it a decade ago. It's far easier to grow a bank with $1.4 billion in assets than one with more than $700 billion -- as Bank of America did in 2003. But that's hardly the whole story. There were a lot of small banks in 2003, and most didn't fare anywhere near as well as Bank of the Ozarks -- and some outright failed.

So, what's the secret?
Poring over the bank's annual reports and letters to shareholders over the past 10 years in search of the special sauce behind its success, I came to one conclusion that was hard to avoid: Good banking is boring banking.

There's little that was fancy or out-of-the-box about what Bank of the Ozarks has done. Except, of course, the way it's exhibited an impressive level of self control during a period when most bankers were acting like Augustus Gloop from Charlie and the Chocolate Factory.

The letter CEO George Gleason wrote to shareholders in 2012 illustrates the bank's dedication to simple, straightforward banking (emphasis mine):

Our net income of $77 million reflects our commitment to three disciplines which have become hallmarks of our Company: superb net interest margin, favorable efficiency and excellent asset quality. 

At a time when Gleason would have been little blamed for taking a victory lap, he instead focused on three basic and supremely boring factors. 

Yet it's hard to get around the fact that these three things were critical to Bank of the Ozarks' success. Regarding asset quality, in 2009, the bank's nonperforming loan ratio peaked at 1.2%. It dropped all the way down to 0.6% the next year. Even as of the third quarter of this year, neither Bank of America nor Wells Fargo have managed to get their nonperforming loans back under 2%. In other words, while many banks spent the mid-2000s lending to anyone with a pulse, Bank of the Ozarks primarily made loans to borrowers in a position to pay them back.

Though Wells Fargo has been an objectively successful bank, its efficiency ratio -- the percentage of revenue that goes to non-interest costs -- reached a decade low of 54% in 2008. Bank of the Ozarks' efficiency ratio didn't breach 50% for a single year over that stretch. Cost discipline may not be sexy, but it's a proven winner time and again.

This wasn't simply the result of coincidence. Bank of the Ozarks' early decade growth strategy set it up well to achieve these results via consistent discipline and culture. Through 2009, it was focused on a "de novo" expansion strategy, which centered on opening new branches in a specific geography -- Arkansas and Northeastern Texas. This was a relatively plodding strategy at a time when many banks were swinging big with large, expensive, far-flung acquisitions they hoped would lead to massive growth in a frothy lending market. 

The latter strategy blew up in the faces of those banks that pursued it -- Bank of America not least among them. The slow-and-steady approach of Bank of the Ozarks, meanwhile, positioned it well to participate in many advantageous FDIC-assisted acquisitions in the wake of the crisis. This led to further expansion for Bank of the Ozarks at a time when most banks were forced to retrench.

Not fair
In a sense, it's not fair to compare Bank of the Ozarks -- which today is still only valued at $2 billion -- to banking leviathans like Bank of America and Wells Fargo. But we're investors, and it's not about being fair -- it's about finding the best returns we can.

Over the past decade, Bank of the Ozarks was a small, growing bank. It was a bank that, like Jim Collins' Good to Great hedgehogs, seemed to know one big thing: In the end, good, disciplined banking wins. 

But just like the companies in Collins' classic, just because Bank of the Ozarks has done it right over the past decade doesn't mean it will automatically repeat its successes over the next 10 years. Maintaining that focus and discipline will be key.

The lessons remain regardless of the future outcome for Bank of the Ozarks, though. When trying to find the best returns in the banking industry, it helps to be a smaller player. It's also key that the bank has an eye toward growing. But above all else, in a risk-management business like banking, staying focused and disciplined is the only way to have the longevity to get the chance to talk about "long-term" returns.