OZRK - Bank of the Ozarks

[walkie518]

stock has continued on a downward trajectory

 

there is hair here but it can't all be bad, from what I understand, the roll-ups likely had character

 

after all of the flooding in Miami, I wonder what happened to construction that was in-progress and how that might have impacted?  likely the sponsors continue to pay and collect insurance?

 

anyone have any add'l thoughts on recent stock price movement or is this a realization of everything negative about the bank previously noted?

[Spekulatius]

I think the rising interest rates apparently causing interest margin pressure and somewhat related RE in NYC falling outa pressure on OZRK’s stock. Nothing really new, but just more of the same.

 

https://therealdeal.com/2018/08/09/nycs-resi-market-hasnt-been-in-a-funk-like-this-since-2009-heres-whats-gone-wrong/

[KCLarkin]

Hopping onto a consensus view on cobf has resulted in rather disappointing results for me in my experience.

 

Your point is well-taken but... BofA and Fiat (AFAIK) are two recent examples where the consensus here was right. And there are plenty of battleground stocks that have done poorly.

[havingheart]

Hopping onto a consensus view on cobf has resulted in rather disappointing results for me in my experience.

 

Your point is well-taken but... BofA and Fiat (AFAIK) are two recent examples where the consensus here was right. And there are plenty of battleground stocks that have done poorly.

 

I should have prefaced my statement with - in my experience - generally*.  When I was even more inexperienced than I am now, I'll admit that I hopped on the ftp.to, bac, fiat, als.to, sandridge, fnmas, aiq, pdh hype train because of admiration/jockey type investing.  Not a knock on anybody, I still admire them all the same for posting.  Successes are forgotten because mistakes are eternalized.  Now I have to go to twitter to find some old posters, while others are permanently gone. COBF still beats reading yahoo boards after all those years though.

 

For my above mistakes, the surface answer is to obviously do my own homework, but I think the original point I was trying to make is that it is easier to outperform if you can articulate/see/empathize with the other side of your trade.  blah blah warren's quote of patsy poker yeah.  For Fiat, it was if you can get past the perception of the quality of their cars/past, then Exor/Ferrari/Sergio.  For BofA, it was a paradigm shift due to the results of the 2016, people, even on here, were complaining of opportunity cost before that.  BofA is a huge black box problem - it's really hard to say what's really going on inside.  Had the paradigm shift not occurred, who knows.

 

At the end of the day, I just wanted to post appreciation for Nate's posting since John said to forget replying.  Highlight for me was when Nate mentioned an opportunity with iron mountain way back.  Was a great opportunity and glad that he shared that and his other various ideas.

 

To stay on topic and for posterity, Q3 call is on Oct 18, and div raised from 0.20 to 0.21.  On the surface at least, definitely doesn't look like OZK is struggling.  This is what I'm going to keep in mind from Gleason:

 

From Gleason Q2:

I think the more important reality that our shareholders ought to be focused on, is whether we come in at 75% or 125% of last year's growth number. Even on the low side of that, we would be producing an organic growth rate that's twice, probably what the industry is producing. So whether we're growing it at two or at three times the industry, we're still generating an excellent growth and certainly, with our stock trading where it is, you buy that growth at a deep discount relative to competitors. So, I think there's an excessive focus on why are they going, are they going to be a little more than last year, or a little less than last year, or a lot more than last year, a lot less than the last year? And the reality is, that our growth is going to be at a very good metric versus the industry.

[walkie518]

others on this topic have noted that in many ways OZK has chased returns making loans against bad collateral

 

as a manager of a company which borrows from a few institutions, I see that every lender likes certain certain kinds of deals, and there are some lenders underwriting different kinds of assets likely because those underwriters know those assets more than lenders not underwriting other assets that, in a broader context, might be understood to be "safe"

 

in other words, there are very safe areas where some lenders don't venture, and there are risky areas where some lenders are willing to take risk in some shape or form

 

what is interesting here is that mgmt could be telling the truth, which if that is the case, we should see a continued deterioration in the stock price as, for example, expensive NYC construction (which while slowing still doing quite well on a $/sqft basis from a decade ago) loses some lustre or there is a correction in the markets unrelated to OZK's underwriting. 

 

A smart banker would underwrite each deal specific to its risks, though in many cases this means it's a small bank underwriting the loan since the asset may not fit neatly in this or that box...thoughts?

 

[TwoCitiesCapital]

Ouch

[oddballstocks]

I thought RESG didn't have bad credits...whoops!

 

This is the first of many releases as RE slows down.  I love who they describe the NC project.  A RE project from the depths of 2008 is being undercut on price by new construction.  I'm sure things are fine.  Keep compounding at 9.99%!!!

 

[IanBezek]

Great call on this one Nate. I've long avoided it, but didn't have the guts to short it outright, thought the economy would have to roll over first. Didn't even take that.

[TwoCitiesCapital]

I thought RESG didn't have bad credits...whoops!

 

This is the first of many releases as RE slows down.  I love who they describe the NC project.  A RE project from the depths of 2008 is being undercut on price by new construction.  I'm sure things are fine.  Keep compounding at 9.99%!!!

 

The weak ones are always the first to fall. They mentioned these had been categorized as sub-par basically the entire time they've been held, but only recently became non-performing.

 

Up to current holders to decide if these are truly one-offs or the start of a broader trend of weakness. I lean towards the latter.

[Spekulatius]

These are old mature loans. Just remember how much they have expanded their loan book since then and how much prices and costs have risen.

 

I am quite miffed , I didn’t keep my puts. I thought my thesis was wrong the shares went down due to NIM pressure and did not expect to show loan losses to show up yet.

[spartansaver]

Does Marty Byrde have an interest in this bank?

[rawraw]

I'm buying tomorrow.  This is the definition of a one sided trade.  The hedge funds are freaking out.  These losses are in line with historical lumpiness of the RESG portfolio. 

 

I knew oddball would be happy :)

[walkie518]

I'm buying tomorrow.  This is the definition of a one sided trade.  The hedge funds are freaking out.  These losses are in line with historical lumpiness of the RESG portfolio. 

 

I knew oddball would be happy :)

 

The trend is not favorable here but pricing is certainly getting interesting after hours...

[oddballstocks]

Dug deeper on the quarter.

 

They're trying to slow CRE, and expect RV & boat lending to fill the gap.  You do a $5m construction project or 200 RV's/boats? I'm not sure I want to pile into RV's top of the cycle, but if you're reaching for yield..

 

Expenses rose significantly.

 

Not boding well for the future.

[AdjustedEarnings]

Now, I'm about to attempt the impossible. That is, to try to see the positives and the negatives in the report objectively. I say 'the impossible', because it seems people are either in the camp that "this is going to 0" or "this is going to infinity", which seems similar to what's happening with Tesla, etc. We do live in a hyperbolic world now, whether in politics (either party), product launches (5G), or investing (TSLA, OZK, etc.). So I shouldn't expect any different. The reality might dwell between extremes. So, that said, let me try to dissect this report:

 

The write-downs: Obviously, this was the unexpected part. Now, these are loans from 2007 and 2008, which were performing until 3Q18. There are two ways to view this. One, why didn't they reserve more earlier? Anyone who knows bank accounting knows that, until the new change is implemented, bank reserving is based on incurred losses. You can have some environmental and general reserves, but you cannot put up reserves on specific loans "just to be conservative". It just doesn't work like that, unlike insurance (which has IBNR). Insurance reserving is prospective, bank reserving is retrospective. The new accounting standard will change this, but won't kick in until 2020. So, if the loan was performing, and you reserved for it the way your reserve all substandard loans (which these were), then did you really do anything bad? Perhaps, you shouldn't have made the loan at all (this would be the short argument, that all loans made by OZK are bunk and have been for 10 years).

 

The positive side of this is, how many banks had C&D 2007-08 loans that performed according to their terms until now? Doesn't that show the NC developer DID have skin in the game the way the bank claims they do, i.e. they did not 'walk' for 10 years? On the Sears/JCP anchored mall, I think it'd be unfair to pin this mall issue on something specific to OZK. The scene on malls has changed totally between 2007 and 2018... if you follow REITs, you know this. Further, the short thesis does not seem to rest on (1) 2007-08 loans, (2) mall-exposure. It rests on the rapid growth experienced after the GFC, so we ought to focus on those. Unless these guys are lying about all their loans, I think their record on low NCOs still stands. Yet, the market reaction seems to assume that these 2007/08 (when other banks had much worse) vintages are somehow indicative of all loans from that point on being bad loans.

 

2007/08 were underwritten under a much different environment and most of them performed well and these two performed for 10 years before going south (one of which was on account of Sears/JCP). So the write-down, obviously not good. But can we draw conclusions from it as it relates to more recent loans? I'm not so sure. Doesn't mean it can't happen, but I don't know if I see it in THIS data.

 

NIM compression: This situation, on the other hand, has deteriorated. There are lots of moving parts. I understand the LIBOR issue. You can see it if you have a Bloomberg or Google, basically didn't move with Fed Funds (which also came later in the quarter). Next, purchased loans are what they are. If you think the acquistions were good ones, the fact that your accretable differences roll off is just a fact of life. Nothing inherently bad in it, though it slows down EPS, which is fine for me. Investment securities: I think this was actually rather well done by management to stay short duration, starting a few quarters ago. Yes it hurts NIM, but I think this is actually a good move. What did bother me is the COIBD. It's not a surprise because they warned on this in 2Q that it'll take a couple of quarters. But I had wished it got better sooner. They're still saying it's in track for 2019, but I don't know if it'll happen on that timeline.

 

Originations & Payoffs: I think this doesn't get talked about much. But the level of payoffs through permanent financings shows you that, their projects aren't failing as some have stated. There's a good level of permanent financing available which, to me indicates, projects are doing fine.

 

RVs: Not an ideal asset class. It's easy to boo hoo it. I get it. But we've got to look at the borrowers. (A COBF special: John Malone loves RVs, it's not all just country bumpkins). I'd say that 790 is a fairly high average FICO. This is not a group that turns in the keys because they don't want to pay anymore. I'd urge everyone on here to check your credit score. I imagine 790 FICO is probably what people on this forum have. How many of you think you'll have your vehicles repossessed in the next recession?

 

Non-interest income/expenses: The Durbin stuff continues as expected. Other than the rebranding, expenses were up a bit. Efficiency ratio is higher than historical but should come down I believe, as management has stated.

 

So overall, I think Originations/payoffs are good. I'm not bothered by RVs. NIM compression is not ideal, though asset side is fine. COIBD is a negative. They are working on it, but I don't like that they think it's "hopefully" going to work. Write-downs are not good, but I'm not sure they support the short case either. Seems more like a coincidence that a 2007/08 mall-loan and Resi C/D would not perform in 2017/18, when the bank happens to be a subject of a short thesis. (Take a look at Wells, etc. and some others with legacy 07-08 assets. NCOs are not uncommon. With Sears now in Ch. 11, we should expect other banks to have some mall hits too). If we see NCOs in 2012 onward vintages, I'll concede this point on write-offs, though. (i.e. "there's never just one cockroach" thing...but it's got to be a cockroach from 2012 onwards)

 

Would love to hear people's thoughts if they are going to be civil and focus on the business.

[oddballstocks]

AdjustedEarnings, great thoughts on earnings.

 

On the RV's, I'm not a hater, I have one myself. It's a great way to escape for the weekend, we paid cash, but then again I'm on this forum...

 

I don't have a specific claim against RV's and boats. It's late cycle.  I don't think the credits are materially worse. I have two issues with it.  The first is volume.  They're going from larger sized loans to smaller sized loans.  When you need volume you start to compete on price, and it's hard to keep discipline and eventually credit quality slips, or you exit the biz.

 

If you go to an RV show they're sold on credit. Meaning you tour these units and the price is "$137 per month", it's like car buying in the 80s.  There is no true price, just whatever they can finance per month.

 

The problem with this 'new' business model is it's chasing hot pockets of yield. You go for construction loans when it's hot, then it cools and you flip to RV's and boats.  All while NIM is starting to contract.  This model has worked for them and will work as long as there's always a something else to jump to.

 

 

 

[khturbo]

First post on this website. Straight into the lion's den with OZK lol. I appreciate everyone's thoughts, and as someone with a small long position, they've been helpful to think through the situation. Especially oddball, lots of good stuff and things to think about.

 

So first off, with the stock in the mid $20s, I think it's important to understand what exactly are the risks going forward. IMO, from here, the long-term risk is that the RESG portfolio blows up the bank. In my model, even with a 1% annual average NCO ratio, we're currently trading at ~10x earnings using even the current NIM. Say that the growth issues are real and the bank stops growing, the loans are only a bit worse than we thought (NCOs were 0.34% on average over the last 20 years before yesterday, so assuming 1% is a bigish jump), NIM and the efficiency ratio don't improve, etc. etc. then mid $20's is fair value at worst. So from this valuation, I'm not too worried about all of that stuff. I tend to think that management can figure that out, they'll be able to grow again, NIM should stabilize, etc. In that case, mid $20s would be a great value and you'd get excellent returns even without the historical levels of asset growth and profitability.

 

Now, all of that kind of depends on the RESG not blowing up the bank! That, obviously, might not be the best assumption. I would be curious to know what the shorts exactly think that this quarter shows. AdjustedEarnings shared some great thoughts. Here are a few of mine:

 

As AE said, it doesn't show that they're reserving incorrectly.

 

An analyst said that this quarter showed that the RESG portfolio isn't "impervious" to risk. I would kind of agree with that.

 

IMO, it doesn't show that the whole loan book is doomed. Everyone is, rightly IMO, worried about all of the construction loans on OZK's books. It's not surprising to see weakness in a shopping mall in the Carolinas and they don't have a ton of that type of exposure so I'm okay with thinking that that's kind of a one off. Additionally, a construction loan in the Carolinas bears little resemblance to a construction loan in NYC, which is obviously what they've moved into.

 

I think the whole point of moving into these bigger, land constrained markets is that while RE prices are high and can be volatile, they're pretty unlikely to crash to below 50% of their value. In the Carolinas, or Texas, or Kentucky, or whatever, there's pretty much unlimited land, people can and do build for cheap, and you can very easily develop some real estate that is going to end up worthless. If you're in the SF bay area, NY, or LA, things might get overheated and developing into that might kill the developer, but it's very, very hard to see a situation where the project is impaired so much that it's effectively worthless. There's too much demand and too little space in these areas to become seriously impaired, unless you do something extremely, extremely dumb.

 

So I'm not sure I buy the argument that since one development loan from North Carolina went bad after 10 years that that means that all of their condo loans in NYC are doomed as well. They're much different credits. I do see that perhaps the average NCO ratio could be higher than I thought, which obviously takes the valuation down by a bunch, but I don't really see the risk of a $0 being higher than it was two days ago - although I do accept that that risk is higher than at most "normal" banks.

 

 

[Shooter MacGavin]

Now, I'm about to attempt the impossible. That is, to try to see the positives and the negatives in the report objectively. I say 'the impossible', because it seems people are either in the camp that "this is going to 0" or "this is going to infinity", which seems similar to what's happening with Tesla, etc. We do live in a hyperbolic world now, whether in politics (either party), product launches (5G), or investing (TSLA, OZK, etc.). So I shouldn't expect any different. The reality might dwell between extremes. So, that said, let me try to dissect this report:

 

The write-downs: Obviously, this was the unexpected part. Now, these are loans from 2007 and 2008, which were performing until 3Q18. There are two ways to view this. One, why didn't they reserve more earlier? Anyone who knows bank accounting knows that, until the new change is implemented, bank reserving is based on incurred losses. You can have some environmental and general reserves, but you cannot put up reserves on specific loans "just to be conservative". It just doesn't work like that, unlike insurance (which has IBNR). Insurance reserving is prospective, bank reserving is retrospective. The new accounting standard will change this, but won't kick in until 2020. So, if the loan was performing, and you reserved for it the way your reserve all substandard loans (which these were), then did you really do anything bad? Perhaps, you shouldn't have made the loan at all (this would be the short argument, that all loans made by OZK are bunk and have been for 10 years).

 

The positive side of this is, how many banks had C&D 2007-08 loans that performed according to their terms until now? Doesn't that show the NC developer DID have skin in the game the way the bank claims they do, i.e. they did not 'walk' for 10 years? On the Sears/JCP anchored mall, I think it'd be unfair to pin this mall issue on something specific to OZK. The scene on malls has changed totally between 2007 and 2018... if you follow REITs, you know this. Further, the short thesis does not seem to rest on (1) 2007-08 loans, (2) mall-exposure. It rests on the rapid growth experienced after the GFC, so we ought to focus on those. Unless these guys are lying about all their loans, I think their record on low NCOs still stands. Yet, the market reaction seems to assume that these 2007/08 (when other banks had much worse) vintages are somehow indicative of all loans from that point on being bad loans.

 

2007/08 were underwritten under a much different environment and most of them performed well and these two performed for 10 years before going south (one of which was on account of Sears/JCP). So the write-down, obviously not good. But can we draw conclusions from it as it relates to more recent loans? I'm not so sure. Doesn't mean it can't happen, but I don't know if I see it in THIS data.

 

NIM compression: This situation, on the other hand, has deteriorated. There are lots of moving parts. I understand the LIBOR issue. You can see it if you have a Bloomberg or Google, basically didn't move with Fed Funds (which also came later in the quarter). Next, purchased loans are what they are. If you think the acquistions were good ones, the fact that your accretable differences roll off is just a fact of life. Nothing inherently bad in it, though it slows down EPS, which is fine for me. Investment securities: I think this was actually rather well done by management to stay short duration, starting a few quarters ago. Yes it hurts NIM, but I think this is actually a good move. What did bother me is the COIBD. It's not a surprise because they warned on this in 2Q that it'll take a couple of quarters. But I had wished it got better sooner. They're still saying it's in track for 2019, but I don't know if it'll happen on that timeline.

 

Originations & Payoffs: I think this doesn't get talked about much. But the level of payoffs through permanent financings shows you that, their projects aren't failing as some have stated. There's a good level of permanent financing available which, to me indicates, projects are doing fine.

 

RVs: Not an ideal asset class. It's easy to boo hoo it. I get it. But we've got to look at the borrowers. (A COBF special: John Malone loves RVs, it's not all just country bumpkins). I'd say that 790 is a fairly high average FICO. This is not a group that turns in the keys because they don't want to pay anymore. I'd urge everyone on here to check your credit score. I imagine 790 FICO is probably what people on this forum have. How many of you think you'll have your vehicles repossessed in the next recession?

 

Non-interest income/expenses: The Durbin stuff continues as expected. Other than the rebranding, expenses were up a bit. Efficiency ratio is higher than historical but should come down I believe, as management has stated.

 

So overall, I think Originations/payoffs are good. I'm not bothered by RVs. NIM compression is not ideal, though asset side is fine. COIBD is a negative. They are working on it, but I don't like that they think it's "hopefully" going to work. Write-downs are not good, but I'm not sure they support the short case either. Seems more like a coincidence that a 2007/08 mall-loan and Resi C/D would not perform in 2017/18, when the bank happens to be a subject of a short thesis. (Take a look at Wells, etc. and some others with legacy 07-08 assets. NCOs are not uncommon. With Sears now in Ch. 11, we should expect other banks to have some mall hits too). If we see NCOs in 2012 onward vintages, I'll concede this point on write-offs, though. (i.e. "there's never just one cockroach" thing...but it's got to be a cockroach from 2012 onwards)

 

Would love to hear people's thoughts if they are going to be civil and focus on the business.

 

Hey AdjustedEarnings.  Thank you for the thoughtful post. I don't have much to add to it.  I think you've  done an intellectually honest and thoughtful job dissecting the earnings report. I think this point in particular was incredibly insightful, and I was unaware of it.

 

 

why didn't they reserve more earlier? Anyone who knows bank accounting knows that, until the new change is implemented, bank reserving is based on incurred losses. You can have some environmental and general reserves, but you cannot put up reserves on specific loans "just to be conservative". It just doesn't work like that, unlike insurance (which has IBNR). Insurance reserving is prospective, bank reserving is retrospective.

[Guest Schwab711]

Agree with Oddball et al, good thoughts on OZK, AE.

 

At $25/26 price, OZK is roughly trading at 1.1x TBV (pretty incredible relative to recent history). What are we assuming if we are buying for TBV? (1) The assets better be worth BV or thereabouts; and (2) The operations earn their cost of capital on a normalized basis (no more, no less).

 

OZK's cost of capital floats a lot and they don't really have a recognizable bank network on any geographical scale outside Arkansas. In my opinion, that's their only core network for the next 5-10 years unless other areas gain traction.

 

On the asset-side, the lending ops (especially RESG) are certainly worth something, I think. My concern after the last 3 reports is that OZK can't even utilize their specialty CRE lenders for another year or so because they over-concentrated. Now they are steered towards a liability-risk profile meant to offset a certain type of loan that they can't originate. It's really hard to match the asset profile of CRE with non-CRE. Thus, they are at the mercy of rates and CRE markets for several quarters. Hopefully it goes well. That's my fear with asset/liability mismatch. The problem seems to be growing faster than I first thought (though maybe they are taking their lumps and normalizing quickly). I don't know, but it's a big risk.

 

What am I buying for TBV? If I'm another bank, I'm buying a loan portfolio I didn't underwrite and isn't particularly attractive if I don't get the customer relationships with the loans. If I buy the bank to keep the operations, I'm buying the relationships, but then I'm stuck with less than cost of capital parts like the network and commodity parts of the bank like indirect RV/marine lending. What are the RESG relationships worth? Are they truly strong or did OZK buy them with promises (or lack thereof from) to the borrower? That's what I keep coming back to with OZK.

 

I don't see OZK being an attractive M&A target for any bank that I know of. It's a tough asset/liability profile to buy in to. You need a particular bank that wants RESG and Arkansas branches (plus a bunch of others all over the place). They never focused on small customers in acquired areas so I can't make much money off the branches for several years, at best. TBV seems like FV until we learn more, but there's downside is larger than upside from there for the moment. As long as RESG is handcuffed, OZK is vulnerable.

[SlowAppreciation]

Appreciate all the thoughts here. Though I started the thread, didn't really know much about the bank—so it's been very helpful to follow this story from others who know far more than I do. Good stuff.

[oddballstocks]

Schwab711, great point on what the value is.  Typically the value of a bank is their relationships.

 

For a business bank it's relationships with businesses.  That gives low cost deposits and fuels loan growth as they have credit needs.

 

For a thrift or heavy residential lender it's the relationships with realtors to drive lending traffic.

 

Indirect RV/marine has none of these relationships. OZK is simply the processor bank.  A dealer can use anyone, and there is a lot of competition here.  The second is their CRE, are these good relationships? I don't know.  Anecdotally I've heard they aren't strong, but who knows.  What I do know is they aren't bringing in any deposits.

 

And like Schwab711 said, there isn't a brand behind this either.  Regional banks have a presence, national banks have a presence. OZK is working on the rebranding to build a presence, but it seems too late.  They should have done this 5-10 years ago.

 

[AdjustedEarnings]

Interesting earnings call.

 

1. The way they described the two credits and the circumstances surrounding them, it would seem these could be 'one-offs', especially the retail Sear/JCP mall. But also the 2007-08 resi loan. One thing is certain, next quarter is not going to give any clarity on this issue. They've written down their immediately troubled loans. If there's more trouble it's not going to be in Q1'19, simply because loans need to go bad before a write-off. The RE market may be softening, but it's not in a free fall and borrowed with 50% equity will continue to make payments this quarter. Also, management says as much when they say: "Given our expectations for excellent net charge-off ratios in the fourth quarter of 2018..." When banks are about to write off credits, its something they generally know is coming and they would not have made that statement. Not saying it's a positive, but just saying Q1 won't tell us one way or another. There simply won't be charge-offs. Longs will say that's a good thing and shorts will say "you just wait". But really, Q1 won't tell us anything on credit barring something truly bizarre happening to the economy in the next 90 days.

 

2. I didn't quite understand the reluctance to even consider repurchases. Not do not do it, but to say, we're not going to even consider that in the November BOD meeting at all sounds a bit weird. I understand the math Gleason is doing on ROTA of 15-17% from reinvesting v/s a P/E of 7-8 implying a 12-14% immediate "return". But I'm not sure how he can know that the price won't be $20 or $15 in November? The refusal to even entertain a repurchase and have authorization ready tells me three things (1) Management is convinced the growth opportunities are compared to their stock price (this is their line of course), (2) they think things will get worse - credit and/or liquidity - and they'll need capital (though no management will ever say that publicly), (3) Management actually wants the flexibility to do repurchases with minimal telecasting ahead of time so as to not affect price (like CABO). I'm not sure which could be true of the three.

 

It should be noted that Gleason is NOT stupid when it comes to knowing the value of stock at different prices... he has sold stock personally when it was at high prices in 2014. He has bought other banks by issuing stock when OZK traded above the target company stock. Then when the stock sold off, he stopped acquiring using equity and also stopped personally selling shares. So all of this makes me think that, for one of three reasons above, Gleason does not think the stock is as attractive as other opportunities available to OZK. Whether we'll see him and other management personally buy it will be something to look for.

 

3. The rest of it was as expected, analysts repeatedly asking the same questions over and over again... Gleason saying that he's committed to the growth strategy despite lumpy quarters (to be fair he's said this for many years, it's not just a defense strategy this quarter)... Gleason describing how borrowers put in their 50% cash into the project first, before OZK funds, etc. etc. all the things that have been said before.

 

What does everyone else think?

[atbed]

Interesting earnings call.

 

1. The way they described the two credits and the circumstances surrounding them, it would seem these could be 'one-offs', especially the retail Sear/JCP mall. But also the 2007-08 resi loan. One thing is certain, next quarter is not going to give any clarity on this issue. They've written down their immediately troubled loans. If there's more trouble it's not going to be in Q1'19, simply because loans need to go bad before a write-off. The RE market may be softening, but it's not in a free fall and borrowed with 50% equity will continue to make payments this quarter. Also, management says as much when they say: "Given our expectations for excellent net charge-off ratios in the fourth quarter of 2018..." When banks are about to write off credits, its something they generally know is coming and they would not have made that statement. Not saying it's a positive, but just saying Q1 won't tell us one way or another. There simply won't be charge-offs. Longs will say that's a good thing and shorts will say "you just wait". But really, Q1 won't tell us anything on credit barring something truly bizarre happening to the economy in the next 90 days.

 

2. I didn't quite understand the reluctance to even consider repurchases. Not do not do it, but to say, we're not going to even consider that in the November BOD meeting at all sounds a bit weird. I understand the math Gleason is doing on ROTA of 15-17% from reinvesting v/s a P/E of 7-8 implying a 12-14% immediate "return". But I'm not sure how he can know that the price won't be $20 or $15 in November? The refusal to even entertain a repurchase and have authorization ready tells me three things (1) Management is convinced the growth opportunities are compared to their stock price (this is their line of course), (2) they think things will get worse - credit and/or liquidity - and they'll need capital (though no management will ever say that publicly), (3) Management actually wants the flexibility to do repurchases with minimal telecasting ahead of time so as to not affect price (like CABO). I'm not sure which could be true of the three.

 

It should be noted that Gleason is NOT stupid when it comes to knowing the value of stock at different prices... he has sold stock personally when it was at high prices in 2014. He has bought other banks by issuing stock when OZK traded above the target company stock. Then when the stock sold off, he stopped acquiring using equity and also stopped personally selling shares. So all of this makes me think that, for one of three reasons above, Gleason does not think the stock is as attractive as other opportunities available to OZK. Whether we'll see him and other management personally buy it will be something to look for.

 

3. The rest of it was as expected, analysts repeatedly asking the same questions over and over again... Gleason saying that he's committed to the growth strategy despite lumpy quarters (to be fair he's said this for many years, it's not just a defense strategy this quarter)... Gleason describing how borrowers put in their 50% cash into the project first, before OZK funds, etc. etc. all the things that have been said before.

 

What does everyone else think?

 

Nice analysis, AdjustedEarnings.

 

There's a lot of great stuff on this thread for generalists.

 

I got nervous about this stock last year, because I didn't know if their high NIM was sustainable; and that, to a large extent, helped them achieve their great efficiency ratio. If NIM and efficiency ratios are not sustainable, they do not deserve to trade at a premium to TBV.

 

The current origination/paydown trends are a positive and a negative. They are (1) pulling back as new projects don't meet their standards and (2) seeing good projects get permanent financing which are both good signs. But now they are experiencing a slowdown in asset growth, guiding to a possible drop in their non-purchased loan book, and facing headwinds to their NIM & efficiency ratio.

 

They will make fewer RESG loans as demand worsens around the country. My sense is that competition has heated up as CRE lenders have stopped tightening standards. So it's kind of hard seeing RESG unfunded balances grow, and therefore enough originations to offset large pay downs. I had thought OZK would leverage their relationships, replacing relatively smaller development loans with much larger stabilized real estate loans. That was part of my original thesis, but apparently that is not the case.

 

Maybe that will change. Otherwise, I am not sure how they will combat falling NIM. It may be hard to build the same deposit franchise, that investors in the space like so much. It's also now nearly impossible to see them make an accretive acquisition.

 

[s8019]

For what it's worth from todays FT article on OZK

 

 

Margins on CRE loans have been put under pressure by competition from non-bank lenders, who often sell loans on to retail investment funds. Jim Costello of Real Capital Analytics said debt funds built their share of new construction lending from 7 per cent in 2015 to 20 per cent this year.

 

These funds have been willing to invest at higher loan-to-value ratios than banking rivals, he said. “Most of it is not crazy lending, but they are stretching on what they are doing,” he said. “This is high octane money coming in late in the cycle.”

 

Just another reminder that lending is a commodity business. It should be quite difficult to compete against "dumb" retail money fueling unregulated shadow banks which can afford any amount of leverage.

[zhengmit]

One thing I want to explore is that even if the OZK comes out ok on loans, it might still need capital.  For example, they always talk about LTV is 52% and they can take over the whole project and still come out making money.  The problem is that the project has to be finished.  What would loan be categorized if borrower decides to walk away?  Would that be NPL because borrower walks away?  OZK can eventually make whole out of it but it has to categorize the loan as NPL where capital ratio needed to support just jumps 50% more.  A few big issues surface, I can see capital ratio is getting tight.