OZRK - Bank of the Ozarks

[SlowAppreciation]

Anyone done any research on OZRK? Seems attractively priced, conservatively run, and long track record of making low-risk loans. There are some short theses floating around on concerns about their loans being more aggressive/reckless than they let on. But that doesn't seem to be the case historically so not sure why all of a sudden this would change.

[thepupil]

It trades for 3.2x last reported tangible and has gone from $2.7B of assets to $18.4B in 7 years.

 

What about that is "attractively priced" or "conservatively run"? Don't those say "aggressive roll-up at a premium"?

 

I have no opinion on the bank, but am just questioning your premise against what my 1 minutes of work on Bloomberg tells me.

[ASTA]

Giverny Capital Inc. check it out what they say about it

[SlowAppreciation]

It trades for 3.2x last reported tangible and has gone from $2.7B of assets to $18.4B in 7 years.

 

What about that is "attractively priced" or "conservatively run"? Don't those say "aggressive roll-up at a premium"?

 

I have no opinion on the bank, but am just questioning your premise against what my 1 minutes of work on Bloomberg tells me.

 

NIM, net charge-off, and LTC ratios are far superior to industry norms so that would imply conservatively run to me.

[SlowAppreciation]

Giverny Capital Inc. check it out what they say about it

 

I can only find that it's ~8% of their portfolio. Do you have a link to something a little meatier?

[thepupil]

http://www.givernycapital.com/assets/documents/102/Conferance_LA_2010.pdf?1284752119

 

This has some info.

 

Very interesting company. You have all the love from a few investors (have found positive writeups over the years) and have also heard short theses that say exact opposite of what data shows (they say very aggressive on loans). When there are such divergent views and an assymetric risk to the downside on valuation, I would have a very high bar in terms of buying.

 

For example here's a bunch of guys with no agenda opining they are aggressive.

 

 

http://www.wallstreetoasis.com/forums/bank-of-the-ozarks-real-estate-specialties-group

 

If Ozarks doesn't do your construction deal you're in trouble.

 

Have worked on a deal with them recently for spec office development...one of the only banks willing to lend with partial recourse on a project with minimal pre-leasing. All other banks required 50%+ preleasing, lower proceeds, crazy recourse provisions.

[oddballstocks]

What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

 

This bank essentially outran the crisis by rolling up other lenders faster than their own loans were going bad.

 

 

[oddballstocks]

An above average NIM doesn't say conservative, it says they're stretching for yield.  You have to ask, if everyone is paying almost 0% on deposits how does a bank get an above average NIM?  It's by doing one of two things:

 

1) Going long yield - They'll get killed as rates rise

2) Higher yielding loans - Business loans, auto loans, construction loans, the type of things that go bad quickly.

 

The WallStreetOasis thread gives some insight into their lending.  As one person said if Ozarks won't fund your construction loan then no one will.  What's that say about the quality of their lending?

 

[SlowAppreciation]

http://www.givernycapital.com/assets/documents/102/Conferance_LA_2010.pdf?1284752119

 

This has some info.

 

Very interesting company. You have all the love from a few investors (have found positive writeups over the years) and have also heard short theses that say exact opposite of what data shows (they say very aggressive on loans). When there are such divergent views and an assymetric risk to the downside on valuation, I would have a very high bar in terms of buying.

 

For example here's a bunch of guys with no agenda opining they are aggressive.

 

http://www.wallstreetoasis.com/forums/bank-of-the-ozarks-real-estate-specialties-group

 

If Ozarks doesn't do your construction deal you're in trouble.

 

Have worked on a deal with them recently for spec office development...one of the only banks willing to lend with partial recourse on a project with minimal pre-leasing. All other banks required 50%+ preleasing, lower proceeds, crazy recourse provisions.

 

Thanks for sharing.

 

Yeah that's what I find very interesting. If they were as aggressive as many claim, then you would think over a 30 year history that loan losses and defaults would be much higher. But instead, they're far below industry norms. Glassdoor reviews indicate it's not a "sales-pressure-y" culture either (though to be fair the reviews mostly come from tellers, while the bulk of their business is CSE lending). But would surprise me to see one side of the business being very aggressive and the other not so.

 

I see people saying "beware" which gives me pause, but see no smoke.

[SlowAppreciation]

What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

 

This bank essentially outran the crisis by rolling up other lenders faster than their own loans were going bad.

 

So where did those bad loans go? Guessing they just bought the good parts of those businesses?

 

(not arguing here at all.... just trying to understand the company more)

[abyli]

We spent one month research OZRK a few months ago and we found that OZRK is the best bank in US. It is like focus value investing: if Warren Buffett is best allocating capital for BRK, why does he need to diversify into something else?

[oddballstocks]

What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

 

This bank essentially outran the crisis by rolling up other lenders faster than their own loans were going bad.

 

So where did those bad loans go? Guessing they just bought the good parts of those businesses?

 

(not arguing here at all.... just trying to understand the company more)

 

Most of their purchases were FDIC-Loss Sharing agreements.

 

Another red flag, their loan growth has come quickly:

 

2012: $2.67b

2014: $5.074b

2015: $8.273b

Q3 2016: $14b

 

They have almost doubled their assets in the last year.

 

Looks like some of their off the charts profitability has come from reducing their ALLL to almost nothing.

 

ALLL/NCL: 33%

ALLL/Loans .18%

NPL/Loans: .78%

 

In an environment where credit quality has peaked and is slowly getting worse they are dialing up.  Instead of increasing ALLL they're at a deficit and growing assets like crazy.

[oddballstocks]

We spent one month research OZRK a few months ago and we found that OZRK is the best bank in US. It is like focus value investing: if Warren Buffett is best allocating capital for BRK, why does he need to diversify into something else?

 

I guess there you go.  This is THE BEST bank in the US..  That's why it's trading so high. 

[abyli]

We spent one month research OZRK a few months ago and we found that OZRK is the best bank in US. It is like focus value investing: if Warren Buffett is best allocating capital for BRK, why does he need to diversify into something else?

 

I guess there you go.  This is THE BEST bank in the US..  That's why it's trading so high.

 

We bought at $35-$37 range, almost 52 week low. We checked why Mr. Andrew Left short this stock and thought those reasons do make any sense.

 

[abyli]

What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

 

This bank essentially outran the crisis by rolling up other lenders faster than their own loans were going bad.

 

So where did those bad loans go? Guessing they just bought the good parts of those businesses?

 

(not arguing here at all.... just trying to understand the company more)

 

Most of their purchases were FDIC-Loss Sharing agreements.

 

Another red flag, their loan growth has come quickly:

 

2012: $2.67b

2014: $5.074b

2015: $8.273b

Q3 2016: $14b

 

They have almost doubled their assets in the last year.

 

Looks like some of their off the charts profitability has come from reducing their ALLL to almost nothing.

 

ALLL/NCL: 33%

ALLL/Loans .18%

NPL/Loans: .78%

 

In an environment where credit quality has peaked and is slowly getting worse they are dialing up.  Instead of increasing ALLL they're at a deficit and growing assets like crazy.

 

They bought two regional banks in southeast area last year. Why assets should not go up then?

[ASTA]

thanks oddball for info yeah I bought at 34.16 so maybe should sell some to raise cash

[SlowAppreciation]

What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

 

This bank essentially outran the crisis by rolling up other lenders faster than their own loans were going bad.

 

So where did those bad loans go? Guessing they just bought the good parts of those businesses?

 

(not arguing here at all.... just trying to understand the company more)

 

Most of their purchases were FDIC-Loss Sharing agreements.

 

Another red flag, their loan growth has come quickly:

 

2012: $2.67b

2014: $5.074b

2015: $8.273b

Q3 2016: $14b

 

They have almost doubled their assets in the last year.

 

Looks like some of their off the charts profitability has come from reducing their ALLL to almost nothing.

 

ALLL/NCL: 33%

ALLL/Loans .18%

NPL/Loans: .78%

 

In an environment where credit quality has peaked and is slowly getting worse they are dialing up.  Instead of increasing ALLL they're at a deficit and growing assets like crazy.

 

Based on their history of loan losses, wouldn't they be justified to have lower ALLL though?

[vox]

I don't think their growth is a "red flag" for asset quality when it's mostly a result of acquisitions.

 

Two deals closed in 2016 which increased total assets by $5.5 billion, two deals closed in 2015 which increased total assets by $2 billion, and two deals closed in 2014 which increased total assets by $1.5 billion.

[watsa_is_a_randian_hero]

I went from long this at split adjusted $10.80 in 2011; sold out after a 50% gain in 5 months.  Watched the stock continue to tear, thought it was overvalued for years.  Finally re-evaluated the way I value them giving benefit for the roll ups and waited for an opportunity to buy back in.  Bought back in 2016 at 36.40. I've been holding since.  My current FV estimate is $56.  Given regulatory market and macro, I wouldnt sell unless it went significantly over my base case valuation. 

[atbed]

I understand where the shorts are coming from. But I reviewed many of OZRK's CRE loans and I am comfortable with the underlying development projects in the sample reviewed.

 

In NYC, the margins on high-end development projects are attractive. It does not cost significantly more to develop a high-end condo, but the price is much higher. This likely changes, but at the moment high margins create a degree of MOS for developers and OZRK. I think this is why OZRK and the developers are so aggressive while most of the industry is tightening their standards.

 

I also bought in the mid-30's last summer. But it is harder to get involved now. The price-to-book (~2.3x) is back to historical norms, so you really have to believe in management or the growth drivers (e.g. organic growth, acquisitions, interest rates, de-reg, tax cuts).

[watsa_is_a_randian_hero]

I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now. 

[Larry]

I currently hold OZRK and it has been a great ride. No doubt that real estate lending has been a great growth driver. Muddy Waters did a short piece on OZRK in last May which pressed the stock price. However insiders bought quite heavily and Dan Thomas who runs their real estate lending group bought about $200k of stock.

 

Those who say that their lending is aggressive, how would you answer to the fact that their net-charge-off ratios are significantly below industry average (http://ir.bankozarks.com/file/1018441/Index?KeyFile=1001219387 take a look at page 9). So it seems like they're still looking heavily after asset quality while no doubt growing their loan book aggressively. I'm not as good as some here with banks so that's why I'm asking.

 

The stock is definitely not cheap especially after the run-up after election. However I'm quite comfortable with my position. CEO and chairman George Gleason who has been running the bank since 1979 still holds significant amount of stock. Btw if anyone is further interested I would recommend reading their earnings transcripts, they give quite good color on their thinking.

 

 

[atbed]

I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

 

I think this strikes the heart of the debate. Is there a way to pick loans like we pick stocks? Will their concentrated book lead to disaster or better risk-adjusted returns?

 

When researching the RESG team, I noticed the prevalence of direct RE investment or development experience. I don't believe you tend to see this in large banks, where they approach underwriting like investors who believes the efficient market hypothesis. Their track record investing in CRE loans is another sign they know what they are doing. At any rate, what really got me comfortable was speaking to developers and sifting through a large sample of their development projects to assess the MOS.

 

 

[Green King]

What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

 

This bank essentially outran the crisis by rolling up other lenders faster than their own loans were going bad.

 

So where did those bad loans go? Guessing they just bought the good parts of those businesses?

 

(not arguing here at all.... just trying to understand the company more)

 

Most of their purchases were FDIC-Loss Sharing agreements.

 

Another red flag, their loan growth has come quickly:

 

2012: $2.67b

2014: $5.074b

2015: $8.273b

Q3 2016: $14b

 

They have almost doubled their assets in the last year.

 

Looks like some of their off the charts profitability has come from reducing their ALLL to almost nothing.

 

ALLL/NCL: 33%

ALLL/Loans .18%

NPL/Loans: .78%

 

In an environment where credit quality has peaked and is slowly getting worse they are dialing up.  Instead of increasing ALLL they're at a deficit and growing assets like crazy.

 

+1 looked at it a few times definitely in the too hard pile. Rapid growth can hide many problems in banking. The catastrophe risk is too high for this one.

[SlowAppreciation]

I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

 

I think this strikes the heart of the debate. Is there a way to pick loans like we pick stocks? Will their concentrated book lead to disaster or better risk-adjusted returns?

 

When researching the RESG team, I noticed the prevalence of direct RE investment or development experience. I don't believe you tend to see this in large banks, where they approach underwriting like investors who believes the efficient market hypothesis. Their track record investing in CRE loans is another sign they know what they are doing. At any rate, what really got me comfortable was speaking to developers and sifting through a large sample of their development projects to assess the MOS.

 

Right but the odd thing is what's the deal with all the anecdotal evidence of aggressive loans and Ozark's alleged willingness to write any business. Something doesn't square