OZRK - Bank of the Ozarks

[jtvalue]

I find all the comments on here to be inflammatory with very little thought behind them.  Where's the second level thinking as Howard Marks would say?

 

-  Since George Gleason (the extremely stupid CEO according to this board) took over OZRK as a single branch close to 40 years ago it's been a 750 bagger.  Since he took the company public in 1997 its generated a 5848% return (21.6% compounded annually) compared to 181.7% (5.1%) for the KBW bank index.

- Was the CEO being stupid when he bought failed municipal auction rate securities at 15% type yields in 2008 when everyone else was running to treasuries?  Was he being stupid when he was purchasing failed banks from the FDIC at pennies on the dollar after the crisis because everybody thought banking was a disaster?  Was he being stupid when his stock rose to 4x TBV and he started issuing shares to buy healthy banks? He quite possibly has the best capital allocation track record of any CEO Ive come across outside of someone like Buffett 

- Since going public in 1997 OZRK's NCO's have been 66% better than the banking industry average despite always having a significant concentration in the so called riskier loans

- OZRK's construction book today has an LTV of 48% and is much higher quality and geographically diversified than it was in 2007 when the LTV was 70%.  Yet OZRK still managed to post record earnings in 2008/2009 and earn 15% ROE's when the rest of the banking industry was brought to his knees.

- OZRK has never been about gathering low cost deposits, but earning the highest risk adjusted returns.  Despite their cost of deposits being higher than industry, they have always had net interest margins superior to the industry.

 

At 13x 2018E EPS and with a 13% TCE ratio I don't understand the short thesis here.  If your right, which in my opinion is very low probability and means the economy is headed for another major recession you make 100%. If your wrong and he continues compounding at 21% a year, it's only a $6 bil market cap and has a minuscule market share in the banking industry, then in 10 years you lose 672%.  Good luck - and please do your due diligence before you take shots as this impressive CEO and his company! 

 

Disclosure: Long OZRK!

[ECCO]

I find all the comments on here to be inflammatory with very little thought behind them.  Where's the second level thinking as Howard Marks would say?

 

-  Since George Gleason (the extremely stupid CEO according to this board) took over OZRK as a single branch close to 40 years ago it's been a 750 bagger.  Since he took the company public in 1997 its generated a 5848% return (21.6% compounded annually) compared to 181.7% (5.1%) for the KBW bank index.

- Was the CEO being stupid when he bought failed municipal auction rate securities at 15% type yields in 2008 when everyone else was running to treasuries?  Was he being stupid when he was purchasing failed banks from the FDIC at pennies on the dollar after the crisis because everybody thought banking was a disaster?  Was he being stupid when his stock rose to 4x TBV and he started issuing shares to buy healthy banks? He quite possibly has the best capital allocation track record of any CEO Ive come across outside of someone like Buffett 

- Since going public in 1997 OZRK's NCO's have been 66% better than the banking industry average despite always having a significant concentration in the so called riskier loans

- OZRK's construction book today has an LTV of 48% and is much higher quality and geographically diversified than it was in 2007 when the LTV was 70%.  Yet OZRK still managed to post record earnings in 2008/2009 and earn 15% ROE's when the rest of the banking industry was brought to his knees.

- OZRK has never been about gathering low cost deposits, but earning the highest risk adjusted returns.  Despite their cost of deposits being higher than industry, they have always had net interest margins superior to the industry.

 

At 13x 2018E EPS and with a 13% TCE ratio I don't understand the short thesis here.  If your right, which in my opinion is very low probability and means the economy is headed for another major recession you make 100%. If your wrong and he continues compounding at 21% a year, it's only a $6 bil market cap and has a minuscule market share in the banking industry, then in 10 years you lose 672%.  Good luck - and please do your due diligence before you take shots as this impressive CEO and his company! 

 

Disclosure: Long OZRK!

 

Agree 100% with you. Georges Gleason track record is amazing. Wherever I see bashing comments (here or RE newspaper), it always seems to be based on macro stuff only.

 

Is it possible that RE loans are not all the same? Is it possible that your loses will not be the same if you loan to cost is lower than other banks? Then why put all RE loans in the same bucket?

 

OZRK is certainly not the average bank.

 

 

[oddballstocks]

I find all the comments on here to be inflammatory with very little thought behind them.  Where's the second level thinking as Howard Marks would say?

 

-  Since George Gleason (the extremely stupid CEO according to this board) took over OZRK as a single branch close to 40 years ago it's been a 750 bagger.  Since he took the company public in 1997 its generated a 5848% return (21.6% compounded annually) compared to 181.7% (5.1%) for the KBW bank index.

- Was the CEO being stupid when he bought failed municipal auction rate securities at 15% type yields in 2008 when everyone else was running to treasuries?  Was he being stupid when he was purchasing failed banks from the FDIC at pennies on the dollar after the crisis because everybody thought banking was a disaster?  Was he being stupid when his stock rose to 4x TBV and he started issuing shares to buy healthy banks? He quite possibly has the best capital allocation track record of any CEO Ive come across outside of someone like Buffett 

- Since going public in 1997 OZRK's NCO's have been 66% better than the banking industry average despite always having a significant concentration in the so called riskier loans

- OZRK's construction book today has an LTV of 48% and is much higher quality and geographically diversified than it was in 2007 when the LTV was 70%.  Yet OZRK still managed to post record earnings in 2008/2009 and earn 15% ROE's when the rest of the banking industry was brought to his knees.

- OZRK has never been about gathering low cost deposits, but earning the highest risk adjusted returns.  Despite their cost of deposits being higher than industry, they have always had net interest margins superior to the industry.

 

At 13x 2018E EPS and with a 13% TCE ratio I don't understand the short thesis here.  If your right, which in my opinion is very low probability and means the economy is headed for another major recession you make 100%. If your wrong and he continues compounding at 21% a year, it's only a $6 bil market cap and has a minuscule market share in the banking industry, then in 10 years you lose 672%.  Good luck - and please do your due diligence before you take shots as this impressive CEO and his company! 

 

Disclosure: Long OZRK!

 

Yes...this time is different.

 

[NBL0303]

I find all the comments on here to be inflammatory with very little thought behind them.  Where's the second level thinking as Howard Marks would say?

 

 

You make excellent points, insofar as calling people stupid or "probably stupid", is reductive and unconstructive. I also agree that when someone has an excellent very long-term track record, we should exercise even greater caution in thinking we understand the situation better than the managers.  So thank you for those good points.

 

--As far as the short thesis, I haven't heard anyone on here advocating for an outright short position, but rather a few posters have mentioned being on the short-side through puts. You obviously believe Bank OZK's historic returns are highly likely to continue into the future at a similar pace. It is possible that this is more likely than not to be true but that puts also have an expectation value. If one believes simply that either a collapse in just the Miami luxury real estate market would cripple the value of their Miami development book such that it would cause substantial losses, that these losses - would essentially bring down the bank and that probability is exacerbated due to the nature of their funding - then you think that some of those puts could return 40 to 1 their premiums. That is a different investment calculus then the outright short position that you suggest is foolish. It is possible that there is an 85% chance that Bank of OZK continues thriving over the next five years but a 15% chance it is a zero.

 

 

OZRK's construction book today has an LTV of 48% and is much higher quality and geographically diversified than it was in 2007 when the LTV was 70%.  Yet OZRK still managed to post record earnings in 2008/2009 and earn 15% ROE's when the rest of the banking industry was brought to his knees.

 

 

--Has the Bank OZK's development loan book has increased dramatically since 2008? If I'm recalling this correctly, of the bank's $22 billion or whatever in assets, their New York book and southern Florida book - which are  development loans - are completely new lines of businesses since 2008? And these new lines of business are a significant part of the bank's assets now. If that is the case, is it possible that they face additional risks to those they encountered in 2008/2009?

 

 

OZRK has never been about gathering low cost deposits, but earning the highest risk adjusted returns.  Despite their cost of deposits being higher than industry, they have always had net interest margins superior to the industry.

 

 

--Why do they seek out, or accept, higher cost deposit sources? This is an earnest question; is it simply because they believe they can lend out the money better than essentially every other lender. If they are really the best lender in the country, then it makes sense that they could pay much more for deposits and acquisitions than basically any other bank.

 

Thus, whichever way one views the bank and its valuation, the quality of their lending is the key determinant. The quality of their lending is not half-the-battle, it is the entire war. 

 

As a shareholder in the company, does it not concern you at all, that there a lots of different sources stating that Bank OZK makes loans that essentially no other lender would make? I guess your point is that they have been a superior lender for a long-time and now they have simply extended their areas of expertise to new areas/types of loans, but they are still just better at it than other lenders and that is how they have achieved superior returns. The articles below each discuss this aspect of the company, that they make loans that no other or few other institutions would make.  As a believer in the company, what do you think the source of their competitive advantage is? In other words, what is it that allows them to be a better lender in New York than all the other New York luxury development lenders and the same in Miami? This is an earnest question; I would love to know what allows them to do so well at generating higher returns than other lenders.

 

https://www.fool.com/investing/2017/10/14/does-bank-of-the-ozarks-make-loans-that-other-bank.aspx

 

https://therealdeal.com/miami/2018/05/18/a-little-arkansas-bank-is-funding-much-of-south-floridas-condo-boom-what-could-go-wrong/

 

https://www.americanbanker.com/news/bank-of-the-ozarks-keeps-bulking-up-in-commercial-real-estate-even-as-rivals-scale-back

 

-There are a number of other sources with similar quotes from bankers. Basically they all say, "We can't make the loans that they make."

 

 

[oddballstocks]

There was an excellent news article (Google it, don't have time right now) where they are quoted as saying "We aren't concerned about risk"

 

When you're clipping a coupon is that what you want to hear?  As NBL0303 points out their expansion, where they've gone out the farthest on the curve is in two hot markets that they had zero exposure to in 2008.

 

I'll reiterate again, read about Penn Square Bank, it was a compounder, long track record, and it walked this path 30+ years ago and brought down some significant banks with it.

 

As mentioned they have risk on both the assets and liabilities side.  Beyond that you have a very arogant CEO who believes they've invented something new and are unstoppable.  Look at the loans they're making.  With the "we won't fail" attitude and the quality of what's on the ground this is dangerous.

 

[oddballstocks]

One other thing that's a potential red flag: https://www.fool.com/investing/2017/09/21/bank-of-the-ozarks-no-longer-submits-regulatory-fi.aspx

 

They stopped SEC filing through a loop hole.  And changed from the Fed to the Arkansas Department of Banking as their regulator.

 

You do moves like this when you don't want people looking over your shoulder.  The coziest regulator is the local state regulator.  They are also the ones least likely to discover issues.

 

For anyone long, I'd recommend you spend a month or two studying bank failures.  Why did banks fail? What caused it? What were the conditions.  The FDIC has some awesome research papers on this on their site.  There are some good books as well.  As a friend said "There were banks with a 15% ROE right up until the day they were closed in the crisis."

 

[NBL0303]

One other thing that's a potential red flag: https://www.fool.com/investing/2017/09/21/bank-of-the-ozarks-no-longer-submits-regulatory-fi.aspx

 

They stopped SEC filing through a loop hole.  And changed from the Fed to the Arkansas Department of Banking as their regulator.

 

 

My first thought on reading about Bank OZK's changing their regulator to the Arkansas Department of Banking was how GE Finance's insurance regulator was the Kansas Insurance Commissioner - and, of course, their long-term care reserves are $15 billion or so underfunded. In fairness, I should mention that I know of a well-run public bank that is conservative in nature and who also chooses not to file with the SEC, because it saves them some money. For Bank OZK it probably makes sense too, in that they believe they understand their development lending far better than others, and far better than the general models that regulators use, that is why they disregard CRE concentration guidelines and such. Given this, I'm sure they have had constant issues with their regulators - and since they are so confident in their approach - they probably felt like they would just save all of those headaches by going with the local regulator.  Again, though, that is the point of regulators and bank exams - to have someone from the outside looking over these types of things.

 

 

 

For anyone long, I'd recommend you spend a month or two studying bank failures.  Why did banks fail? What caused it? What were the conditions.  The FDIC has some awesome research papers on this on their site.  There are some good books as well.

 

 

Oddball - I have read a number of books about this subject, but I would love to hear which books you like the most Oddball. I have always appreciated your investment writing a great deal - so I would love to read the books that you referenced in your post - do you mind sharing a few that you particularly liked?  Thank you!

[oddballstocks]

Oddball - I have read a number of books about this subject, but I would love to hear which books you like the most Oddball. I have always appreciated your investment writing a great deal - so I would love to read the books that you referenced in your post - do you mind sharing a few that you particularly liked?  Thank you!

 

Check out Belly Up, it's most pertinent to this. I used to visit the Pittsburgh Business Library, would stand in the banking aisle and read chapters on the S&L crisis during my lunch hour.  I never checked anything out and don't have the specific books, although if I took you there I could pick them out of the shelf by their cover..  But the stories in there were very similar to Belly Up.  That's sort of the secret, the stories of all of these failures are all similar because the failure conditions at a bank are limited.

 

Another on my shelf and very highly recommended (although I haven't read yet) is Dead Bank Walking by Robert Smith

[NBL0303]

Oddball - I have read a number of books about this subject, but I would love to hear which books you like the most Oddball. I have always appreciated your investment writing a great deal - so I would love to read the books that you referenced in your post - do you mind sharing a few that you particularly liked?  Thank you!

 

Check out Belly Up, it's most pertinent to this. I used to visit the Pittsburgh Business Library, would stand in the banking aisle and read chapters on the S&L crisis during my lunch hour.  I never checked anything out and don't have the specific books, although if I took you there I could pick them out of the shelf by their cover..  But the stories in there were very similar to Belly Up.  That's sort of the secret, the stories of all of these failures are all similar because the failure conditions at a bank are limited.

 

Another on my shelf and very highly recommended (although I haven't read yet) is Dead Bank Walking by Robert Smith

 

Grazie!

[DTEJD1997]

Hey all:

 

I'm of two minds on this bank, and I have not yet done any in depth research...

 

1). Is the money they save by NOT filing with SEC worth the "loss of safety perception" in the investor community?  Is it worth a MULTI billion dollar bank's time to do this to save a million dollars?

 

2). How are they that much better at underwriting CONSTRUCTION loans in NYC and Miami than their local market competitors?  They appear to be taking loans/risks that no other banks will.  Maybe that works out just fine in a strong/rising market?  What happens if things slow down OR even go into a recession?

 

ON THE OTHER HAND...

 

1). They clearly have been successful in the past.  Can't argue with that.

 

2). I read somewhere that a lot of their Miami loans are at 50% LTV?  If the developer has that "skin in the game" there is a tremendous margin of safety for the bank.  Of course, maybe that LTV is skewed with the developer having "marked up" equity or other such non-sense?

 

LASTLY:

 

Oddballstocks knows a LOT about banking...if he is getting long dated, deeply out of the money puts for a bargain price, that might be a tremendous speculation.  Odds are he is wrong, but he most certainly could be right (25% chance?).  If he is right, he makes 15x, 20X or more on his position?  Seems like good odds to me.

 

 

[Guest Schwab711]

My understanding of OZRK's C&I LTV is that pre-crisis, OZRK generally originated recourse loans to above average borrowers/projects, which is why they had a higher LTV. My best guess is something like 40%-50% of C&I loans are now non-recourse and lower quality borrowers. That's why LTV appears to be higher quality. We also know that projections for these projects use assumptions related to housing market/CRE rent trajectory. Due to the GFC RE decline, recent "long-term" growth trends are likely higher than what we can expect the median growth rate to be (particularly in the NYC/Miami luxury condo market). I think part of the reason "OZRK is making loans no one else will make" is concerning is that projections backing these loans could feasibly be nonsense. NYC luxury condo market has been increasing volatile and parts have been declining since late-2015. You also have interest rates increasing and greater awareness of money laundering that occurs in these properties (which has further boosted sales prices/project values). There are few tailwinds left, but many potential headwinds.

 

I think OZRK's EBT/shr will peak within 1-2 rate hikes. NIM is already declining over the last few years despite an 80% variable loan book. I can't predict yield curves but from the liability side, we know that excess reserves are decreasing and short-term rates will almost certainly increase. The cost of time deposits is likely to outpace the increase in the overnight rate as a result. That means further NIM contraction paired with declining C&I project valuations (generally). Local markets have other, additional factors, as mentioned above. So lower reward for increasing risk. This is basically the thesis a few folks were talking about early in this thread.

 

It is impossible to know the quality of their loans without seeing the loan book (and even then, it's tough to predict the future). However, we do know how most growing banks fail (as Oddball and NBL have discussed) and OZRK seems to fit a lot of those patterns. Those patterns have a relatively good prediction rate (so good that the regulators look for the very same trends).

 

As to the regulator situation, I can't find the comment but OZRK's CEO alluded to still being regulated at the Federal level because they are insured by the FDIC. I found this to be fairly disingenuous since the FDIC is tasked to avoid taxpayer losses (by indemnifying insured deposits). A substantial portion of OZRK's deposits are likely uninsured. Thus, the FDIC will likely not be involved until late in any deterioration process. Thus, the State Bank of Arkansas is essentially their only regulator. OZRK is 23% of the assets they regulate. I have a hard time believing that AR is the best regulator for this bank.

[Spekulatius]

Hey all:

 

I'm of two minds on this bank, and I have not yet done any in depth research...

 

1). Is the money they save by NOT filing with SEC worth the "loss of safety perception" in the investor community?  Is it worth a MULTI billion dollar bank's time to do this to save a million dollars?

 

2). How are they that much better at underwriting CONSTRUCTION loans in NYC and Miami than their local market competitors?  They appear to be taking loans/risks that no other banks will.  Maybe that works out just fine in a strong/rising market?  What happens if things slow down OR even go into a recession?

 

ON THE OTHER HAND...

 

1). They clearly have been successful in the past.  Can't argue with that.

 

2). I read somewhere that a lot of their Miami loans are at 50% LTV?  If the developer has that "skin in the game" there is a tremendous margin of safety for the bank.  Of course, maybe that LTV is skewed with the developer having "marked up" equity or other such non-sense?

 

LASTLY:

 

Oddballstocks knows a LOT about banking...if he is getting long dated, deeply out of the money puts for a bargain price, that might be a tremendous speculation.  Odds are he is wrong, but he most certainly could be right (25% chance?).  If he is right, he makes 15x, 20X or more on his position?  Seems like good odds to me.

 

The cost to file with the SEC may be relevant for a bank with a $100M balance sheet and $10M in equity, but it for sure isn’t a factor for a bank with a $6B market cap and $22B balance sheet. I don’t own of any public bank of similar size that does not file with the SEC and I don’t know of any other bank that does not file it’s the FDIC. I didn’t even know that a bank can avoid filing with the FDIC even the dinkiest banks that are “dark” file with the FDIC. truly unique and you really have to ask yourself, why they are hiding or avoiding scrutiny so much. I thought I have seen it all, but apparently that is not the case. LOL

 

I don’t think these guys are stupid, they are smart, but they are also gamblers. It does not matter if they have been right 5x or 10x in a row, because the way they bet, OZRK will go broke if they are wrong once.

 

I am with Oddball that thr way to trade this is for tail end risk.

[StubbleJumper]

Hey all:

 

I'm of two minds on this bank, and I have not yet done any in depth research...

 

1). Is the money they save by NOT filing with SEC worth the "loss of safety perception" in the investor community?  Is it worth a MULTI billion dollar bank's time to do this to save a million dollars?

 

2). How are they that much better at underwriting CONSTRUCTION loans in NYC and Miami than their local market competitors?  They appear to be taking loans/risks that no other banks will.  Maybe that works out just fine in a strong/rising market?  What happens if things slow down OR even go into a recession?

 

ON THE OTHER HAND...

 

1). They clearly have been successful in the past.  Can't argue with that.

 

2). I read somewhere that a lot of their Miami loans are at 50% LTV?  If the developer has that "skin in the game" there is a tremendous margin of safety for the bank.  Of course, maybe that LTV is skewed with the developer having "marked up" equity or other such non-sense?

 

LASTLY:

 

Oddballstocks knows a LOT about banking...if he is getting long dated, deeply out of the money puts for a bargain price, that might be a tremendous speculation.  Odds are he is wrong, but he most certainly could be right (25% chance?).  If he is right, he makes 15x, 20X or more on his position?  Seems like good odds to me.

 

The cost to file with the SEC may be relevant for a bank with a $100M balance sheet and $10M in equity, but it for sure isn’t a factor for a bank with a $6B market cap and $22B balance sheet. I don’t own of any public bank of similar size that does not file with the SEC and I don’t know of any other bank that does not file it’s the FDIC. I didn’t even know that a bank can avoid filing with the FDIC even the dinkiest banks that are “dark” file with the FDIC. truly unique and you really have to ask yourself, why they are hiding or avoiding scrutiny so much. I thought I have seen it all, but apparently that is not the case. LOL

 

I don’t think these guys are stupid, they are smart, but they are also gamblers. It does not matter if they have been right 5x or 10x in a row, because the way they bet, OZRK will go broke if they are wrong once.

 

I am with Oddball that thr way to trade this is for tail end risk.

 

 

Prem Watsa de-listed an international P&C insurance company of roughly that market cap and balance sheet from the NYSE to avoid the costs of US financial regulation (admittedly, this was principally Sarbanes Oxley).

 

I have no horse in this particular race, but I don't blame management teams for trying to avoid regulatory over-reach.

 

 

SJ

[Spekulatius]

Prem Watsa de-listed an international P&C insurance company of roughly that market cap and balance sheet from the NYSE to avoid the costs of US financial regulation (admittedly, this was principally Sarbanes Oxley).

 

I have no horse in this particular race, but I don't blame management teams for trying to avoid regulatory over-reach.

 

I didn’t know that filing regular FDIC  and SEC doc US is now considered regulatory overreach.

FFH is not an US Company and it’s US insurance companies still have to file the statutory accounts with state regulators and file with SEDAR. OZRK is an US bank and hence regulated. they are the only bank that I am aware of that does not neither file with the FDIC and the SEC.

 

This will be an interesting case study a few years down the road.

 

[Guest Schwab711]

http://webcache.googleusercontent.com/search?q=cache:gM4I31zPu_0J:www.arkansasbusiness.com/article/119065/bank-of-the-ozarks-move-slices-reporting-obligations-to-fed+&cd=5&hl=en&ct=clnk&gl=us&client=ms-android-motorola

 

This is a good summary. I was surprised how many there were like OZRK.

 

National charter => must be a member bank (own fed bank stock and regulated by the Fed)

National charter = regulated by UST (through OCC) and Fed

State member = regulated by Fed and State Bank

State non-member = regulated by state bank

 

If you offer FDIC insurance on deposits then you must file call reports with the FDIC. I know there's some private deposit insurers but it's more of a credit union thing.

[StubbleJumper]

Prem Watsa de-listed an international P&C insurance company of roughly that market cap and balance sheet from the NYSE to avoid the costs of US financial regulation (admittedly, this was principally Sarbanes Oxley).

 

I have no horse in this particular race, but I don't blame management teams for trying to avoid regulatory over-reach.

 

I didn’t know that filing regular FDIC  and SEC doc US is now considered regulatory overreach.

FFH is not an US Company and it’s US insurance companies still have to file the statutory accounts with state regulators and file with SEDAR. OZRK is an US bank and hence regulated. they are the only bank that I am aware of that does not neither file with the FDIC and the SEC.

 

This will be an interesting case study a few years down the road.

 

 

To be clear, I have no idea what sort of regulatory burden that OZRK faced.  There is, however, somewhat of a consensus that the pendulum may have swung a little far on regulation over the past 10 or so years.  SOX is one that is frequently reviled, and the TBTF banks rail at the capital and reporting requirements that have been imposed since the financial crisis.  Anybody playing in the field of special situations sees companies going dark, and they do it for a reason.  So, is it regulatory over-reach?  I can't say specifically for OZRK, but they sure as heck wouldn't be the first company to take significant measures to escape endless paperwork.

 

 

SJ

 

 

BTW, I consider FFH to be primarily a US company and I always think of their results and stock price in US dollars. Prem even went to great trouble to get it listed on the NYSE...and then he went to great trouble to get it de-listed, despite the fact that the majority of its business is conducted south of the 49th.

[oddballstocks]

Prem Watsa de-listed an international P&C insurance company of roughly that market cap and balance sheet from the NYSE to avoid the costs of US financial regulation (admittedly, this was principally Sarbanes Oxley).

 

I have no horse in this particular race, but I don't blame management teams for trying to avoid regulatory over-reach.

 

I didn’t know that filing regular FDIC  and SEC doc US is now considered regulatory overreach.

FFH is not an US Company and it’s US insurance companies still have to file the statutory accounts with state regulators and file with SEDAR. OZRK is an US bank and hence regulated. they are the only bank that I am aware of that does not neither file with the FDIC and the SEC.

 

This will be an interesting case study a few years down the road.

 

 

To be clear, I have no idea what sort of regulatory burden that OZRK faced.  There is, however, somewhat of a consensus that the pendulum may have swung a little far on regulation over the past 10 or so years.  SOX is one that is frequently reviled, and the TBTF banks rail at the capital and reporting requirements that have been imposed since the financial crisis.  Anybody playing in the field of special situations sees companies going dark, and they do it for a reason.  So, is it regulatory over-reach?  I can't say specifically for OZRK, but they sure as heck wouldn't be the first company to take significant measures to escape endless paperwork.

 

 

SJ

 

 

BTW, I consider FFH to be primarily a US company and I always think of their results and stock price in US dollars. Prem even went to great trouble to get it listed on the NYSE...and then he went to great trouble to get it de-listed, despite the fact that the majority of its business is conducted south of the 49th.

 

Here's what they went from. A regulator asking them for proof that the loans they are making aren't risking, and showing with data historic loss rates.  To the state department where they're telling them how things work the Ozark way...

 

You save $150-250k a year by going dark.  Maybe they fired a few compliance people ($40k a year).  So what's that? Maybe $400k a year in savings? Peanuts.

[RoadToUtopia]

They are def reaching and making riskier loans that other banks are passing on but they are generally lending at 50% LTC, doesn't that de-risk their loans a bit?

 

 

[NBL0303]

They are def reaching and making riskier loans that other banks are passing on but they are generally lending at 50% LTC, doesn't that de-risk their loans a bit?

 

That is a great question, and one I have been thinking about myself. I would love to hear Oddball's comments on this. A few of my thoughts are that the same issue that has been discussed on here about Bank OZK making loans that no other bank would make relates to this point as well, in the sense that - other banks could lend to these projects at the same LTV but pass. But, the counter-point, again, is that Bank OZK is just a better lender/credit analyst on these projects then their competitors.

 

Some of my other initial thoughts about this are that since they are doing ground-up projects - I think that makes the V or C part of the ratio more tentative. If one of these projects goes sideways, before it it completed - the value of the collateral could be ephemeral. I believe some lenders who have had blowups in the past also had low-ish LTVs and LTCs but the Vs and Cs changed very quickly in the midst of a crisis.

 

I would love to hear others thoughts about this point.

[Guest Schwab711]

They are def reaching and making riskier loans that other banks are passing on but they are generally lending at 50% LTC, doesn't that de-risk their loans a bit?

 

They used to do recourse loans. Now a large percentage on NYC/Miami C&I is non-recourse.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ozrk-bank-of-the-ozarks/msg334362/#msg334362

[Spekulatius]

They are def reaching and making riskier loans that other banks are passing on but they are generally lending at 50% LTC, doesn't that de-risk their loans a bit?

 

That is a great question, and one I have been thinking about myself. I would love to hear Oddball's comments on this. A few of my thoughts are that the same issue that has been discussed on here about Bank OZK making loans that no other bank would make relates to this point as well, in the sense that - other banks could lend to these projects at the same LTV but pass. But, the counter-point, again, is that Bank OZK is just a better lender/credit analyst on these projects then their competitors.

 

Some of my other initial thoughts about this are that since they are doing ground-up projects - I think that makes the V or C part of the ratio more tentative. If one of these projects goes sideways, before it it completed - the value of the collateral could be ephemeral. I believe some lenders who have had blowups in the past also had low-ish LTVs and LTCs but the Vs and Cs changed very quickly in the midst of a crisis.

 

I would love to hear others thoughts about this point.

 

I doubt that they do LTV loans with 50% of equity. Or if they do, they have an unconventional way of calculating value. Other lender are not stupid. Also, the evidence shows, that they seem to rack up thrift lan books in certain areas very quickly.  I agree there could be something that the bears have missed and that they are really much better than anyone else. That’s Ok, the bet is on the tail risk anyways.

[zhengmit]

I don't think it is 50% equity.  Most structure is 50% debt + 30% Mezz + 20% Equity, at least this is NYC deal structure.  LTV of 50% is correct as debt is 50%.  Equity holders might give up given that they put in just 20%.  Not sure who owns Mezz piece.

[DTEJD1997]

I don't think it is 50% equity.  Most structure is 50% debt + 30% Mezz + 20% Equity, at least this is NYC deal structure.  LTV of 50% is correct as debt is 50%.  Equity holders might give up given that they put in just 20%.  Not sure who owns Mezz piece.

 

That makes a lot more sense...

 

Who would have a 50% equity and then 50% bank debt (mortgage) on a real estate project?

 

If that were indeed the case, AND there was nothing goofy going on with the valuation of the equity position...why could not a competitor bank come in and offer 60% financing and scoop up these projects, OR take future business from OZRK?

[oddballstocks]

They are def reaching and making riskier loans that other banks are passing on but they are generally lending at 50% LTC, doesn't that de-risk their loans a bit?

 

That is a great question, and one I have been thinking about myself. I would love to hear Oddball's comments on this. A few of my thoughts are that the same issue that has been discussed on here about Bank OZK making loans that no other bank would make relates to this point as well, in the sense that - other banks could lend to these projects at the same LTV but pass. But, the counter-point, again, is that Bank OZK is just a better lender/credit analyst on these projects then their competitors.

 

Some of my other initial thoughts about this are that since they are doing ground-up projects - I think that makes the V or C part of the ratio more tentative. If one of these projects goes sideways, before it it completed - the value of the collateral could be ephemeral. I believe some lenders who have had blowups in the past also had low-ish LTVs and LTCs but the Vs and Cs changed very quickly in the midst of a crisis.

 

I would love to hear others thoughts about this point.

 

Like the phrase "Beauty is in the eye of the beholder" "L and C have value in the eye of the lender"  Whether that value is real is debatable.

 

Imagine you are building a luxury complex.  You are going to sell 50 units for $1,000,000 apiece, so you have a $50m "value".  So the bank says "we'll lend $25m, we're super conservative."

 

A slump hits, suddenly people buying $1m apartments dries up and prices slump 25%, now the 'value' is $37m and this is a LTV of 68%.  Under the new ALLL calculations the bank would need to reserve against this loss now.  And in a slump the calculation for losses jumps (which is why banks complained).  You can go through this and work out exactly what is needed before the capital disappears.

 

Let's also remember that during a slump it isn't uncommon for construction projects to just stop.  When your loans are shorter term and the way the borrower is going to repay is through completing the project a pause suddenly becomes an issue.

 

 

[oddballstocks]

I don't think it is 50% equity.  Most structure is 50% debt + 30% Mezz + 20% Equity, at least this is NYC deal structure.  LTV of 50% is correct as debt is 50%.  Equity holders might give up given that they put in just 20%.  Not sure who owns Mezz piece.

 

That makes a lot more sense...

 

Who would have a 50% equity and then 50% bank debt (mortgage) on a real estate project?

 

If that were indeed the case, AND there was nothing goofy going on with the valuation of the equity position...why could not a competitor bank come in and offer 60% financing and scoop up these projects, OR take future business from OZRK?

 

Because no one wants the business they're doing in the first place?  They're lending to projects that other banks have turned down as too risky or too speculative.  OZRK is lending on generous terms.  Why would a bank want to scoop up what they consider a bad loan, even at a good price?  Buying defunct construction loans is a bad business.