Bank OZK has been treading water for the past six months, recording a small loss of 1.3% while holding steady at $44.88. The stock also fell short of the S&P 500’s 11.5% gain during that period.

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Why Is Bank OZK Not Exciting?

We're cautious about Bank OZK. Here are three reasons we avoid OZK and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Bank OZK’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 9.1% over the last two years was well below its five-year trend. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

2. Net Interest Margin Dropping

The net interest margin (NIM) is a key profitability indicator that measures the difference between what a bank earns on its loans and what it pays on its deposits. This metric measures how efficiently one can generate income from its core lending activities.

Over the past two years, Bank OZK’s net interest margin averaged 4.6%. However, its margin contracted by 89 basis points (100 basis points = 1 percentage point) over that period.

This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean Bank OZK either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.

3. Efficiency Ratio Expected to Falter

Topline growth alone doesn't tell the complete story - the profitability of that growth shapes actual earnings impact. Banks track this dynamic through efficiency ratios, which compare non-interest expenses such as personnel, rent, IT, and marketing costs to total revenue streams.

Investors focus on efficiency ratio changes rather than absolute levels, understanding that expense structures vary by revenue mix. Counterintuitively, lower efficiency ratios indicate better performance since they represent lower costs relative to revenue.

For the next 12 months, Wall Street expects Bank OZK to become less profitable as it anticipates an efficiency ratio of 37.6% compared to 34.7% over the past year.

Final Judgment

Bank OZK isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 0.8× forward P/B (or $44.88 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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