OZRK - Bank of the Ozarks

[oddballstocks]

Look into why they jumped from the Fed to Arkansas, there is a LOT more to it.

 

I've done some scuttlebutting on this one Fisher style.  I'd say investigate the regulator change, and look at how the Fed regulates banks, what they allow and what they don't allow.  That will answer any and all questions regarding the loan quality.

 

 

Poor quality loans + under-reserved + concentrated lending = nightmare in a recession

 

 

 

[watsa_is_a_randian_hero]

Poor quality loans + under-reserved + concentrated lending = nightmare in a recession

 

Why didn't they have a nightmare in the last recession?  You're saying OZRK was fine in the last recession but is now taking on these new risks?  Why would Gleason, after decades of growing this business, and after building his legacy and $280 million wealth (plus whatever reinvested wealth he has from dividends and past stock sales, call it a half billion all in), why would he risk throwing his entire career and legacy away at the sunset of his career?  This is the problem I have with the bear thesis.

 

Gleason has never been afraid of risk; he bought the company early in his career almost entirely through leverage.  I think he's been smart from a risk/reward perspective though; I dont see why it would be different now.

[NBL0303]

Poor quality loans + under-reserved + concentrated lending = nightmare in a recession

 

Why didn't they have a nightmare in the last recession?  You're saying OZRK was fine in the last recession but is now taking on these new risks?  Why would Gleason, after decades of growing this business, and after building his legacy and $280 million wealth (plus whatever reinvested wealth he has from dividends and past stock sales, call it a half billion all in), why would he risk throwing his entire career and legacy away at the sunset of his career?  This is the problem I have with the bear thesis.

 

Gleason has never been afraid of risk; he bought the company early in his career almost entirely through leverage.  I think he's been smart from a risk/reward perspective though; I dont see why it would be different now.

 

I believe nearly all of the assets on their books (Like nearly  $20 billion out of their $23 billion or whatever) are different in nature then their assets circa 2007. Obviously, the acquisitions will do that, but t nearly all of the loans we have been discussing on this thread are the construction loans in New York City and the Miami Area (and some other places) and these are 100% new lines of business since the recession. I know that they started their Specialty Real Estate division in like 2004, but what they have done since is different in both quality and quantity.

 

[watsa_is_a_randian_hero]

NBL0303 - that doesn't answer my question.  I'm saying, they didn't blow up in any of the recessions over the last few decades since under Gleason's control.  So you are all implying they are doing something different, taking more risk.

 

I'm questioning that implication - pointing to Gleason's track record.

[NBL0303]

NBL0303 - that doesn't answer my question.  I'm saying, they didn't blow up in any of the recessions over the last few decades since under Gleason's control.  So you are all implying they are doing something different, taking more risk.

 

I'm questioning that implication - pointing to Gleason's track record.

 

Sorry - I may be missing the point. I was trying to point out that though they didn't blow up in the last recession, they have categorically changed the bank since the last recession and all of the lending that people are questioning has occurred since the last recession. I thought this was directly responsive to the argument that they hadn't blown up in the last recession so why would this one be any different? I am not saying that it definitely will be different, but I am saying that it could be different because the bank is now very different.

 

I really may be missing the point here - I'm sorry if I am.  If the point is that Gleason has been terrific for a long time, so no amount of substantive analysis of his decisions will give us any predictive insight into the bank, then I suppose I just disagree with that. While Gleason deserves credit for all that he has done, I still believe it is worth examining and analyzing what he or any company or executive has done recently to attempt to analyze a comapny's value/risks and future prospects.

 

I thought all of us investors in the CoBF community subscribed to the notion that past success and achievements are not a guarantee of future success. We analyze Berkshire and Fairfax to try to understand what they are doing currently and if that still aligns with our understanding of the company and its operations. It may also be worth stating that many, many blowups followed a long period of tremendous success.  John Meriwether and the LTCM crew were the most heralded quantitative investors of their time and had a tremendous long-term track record and Nobel Prizes to boot. Many on this site are disappointed with Bruce Berkowitz because they feel that he had been a great investor for a long-time, but then made poor decisions that virtually blew up the Fairholme Fund. Washington Mutual bank (and other banks) had a long run of tremendous success before they crumbled. Obviously, this list of success preceding calamity goes on and on. That is why we analyze companies and executives, even great ones, to attempt to determine if the future will be much different than their past. Thus, I think it is worth analyzing Bank OZK and its potential risks, despite Gleason's tremendous success to date.

[watsa_is_a_randian_hero]

I really may be missing the point here - I'm sorry if I am.  If the point is that Gleason has been terrific for a long time, so no amount of substantive analysis of his decisions will give us any predictive insight into the bank, then I suppose I just disagree with that.

 

My point is not that his track record is a substitute for analysis.  My point is that his track record and his point in his career are not consistent with the thesis that the bank has "categorically changed" (your quote) from the last recession.  My point is questioning that - why would a successful banker at this point in his career categorically change his bank taking substantially more risk in new/different ways than he has in the past? 

 

He is 63 and at the later stages of his career.  There is no need for "hail mary" risk, and doing so in the midst of a long expansion (following successfully navigating your company through one of greatest recessions), just doesnt make sense to me, and isn't consistent with his past successes. 

 

If you're at a casino, and you've already had an incredible run and turned $1000 into $100,000, and you've been gambling all night and its now 6am, you don't take your entire bank roll and put it on another bet, risking losing everything. 

 

[Hielko]

I really may be missing the point here - I'm sorry if I am.  If the point is that Gleason has been terrific for a long time, so no amount of substantive analysis of his decisions will give us any predictive insight into the bank, then I suppose I just disagree with that.

 

My point is not that his track record is a substitute for analysis.  My point is that his track record and his point in his career are not consistent with the thesis that the bank has "categorically changed" (your quote) from the last recession.  My point is questioning that - why would a successful banker at this point in his career categorically change his bank taking substantially more risk in new/different ways than he has in the past? 

 

He is 63 and at the later stages of his career.  There is no need for "hail mary" risk, and doing so in the midst of a long expansion (following successfully navigating your company through one of greatest recessions), just doesnt make sense to me, and isn't consistent with his past successes. 

 

If you're at a casino, and you've already had an incredible run and turned $1000 into $100,000, and you've been gambling all night and its now 6am, you don't take your entire bank roll and put it on another bet, risking losing everything.

Have you ever been at a casino? The people who turn $1000 into $100,000 would exactly be the kind of people who would want to risk it all again! Why do you think they didn't stop when they turned that $1000 into $10,000 for example?

 

Anyway, not sure how useful that comparison is. I sort of agree with you that it wouldn't make sense for someone like that to start taking massive risks, but at the same time I can see plenty of reasons why it could happen. For example, he wouldn't be the first person to start believing in it's own genius and invincibility after doing a couple of good deals.

[Grafter]

My point is not that his track record is a substitute for analysis.  My point is that his track record and his point in his career are not consistent with the thesis that the bank has "categorically changed" (your quote) from the last recession.  My point is questioning that - why would a successful banker at this point in his career categorically change his bank taking substantially more risk in new/different ways than he has in the past? 

 

If you're at a casino, and you've already had an incredible run and turned $1000 into $100,000, and you've been gambling all night and its now 6am, you don't take your entire bank roll and put it on another bet, risking losing everything.

 

I don't know his personal motivations.  Though do you have any idea why Ken Lay and Jeff Skilling did what they did at Enron?  As Ken was in his 60s when it blew up.  Or why Dennis Kozlowski did what he did at Tyco?

 

While Gleason has a great track record, at the same time, he is probably under a lot of pressure (given his visibility and record).  Both to generate the quarterly number in addition to trying to be named the top performing bank (as he currently has 7 sequential years).  But that is just hypothesizing, as I haven't seen interviews with him mentioning his motivations.

 

However, even with his record, the bank has changed what it is doing, between the changes in the loan mixtures, scuttlebutt on the loan terms and type, and seeking less regulation/oversight (by dissolving the bank holding company).  So, like others have pointed out, it does seem like something isn't quite right and things may very well be okay, until they aren't (but that would probably require our observations to be correct as well as a downturn in those markets).

 

 

[NBL0303]

 

My point is not that his track record is a substitute for analysis.  My point is that his track record and his point in his career are not consistent with the thesis that the bank has "categorically changed" (your quote) from the last recession.  My point is questioning that - why would a successful banker at this point in his career categorically change his bank taking substantially more risk in new/different ways than he has in the past? 

 

He is 63 and at the later stages of his career.  There is no need for "hail mary" risk, and doing so in the midst of a long expansion (following successfully navigating your company through one of greatest recessions), just doesnt make sense to me, and isn't consistent with his past successes. 

 

If you're at a casino, and you've already had an incredible run and turned $1000 into $100,000, and you've been gambling all night and its now 6am, you don't take your entire bank roll and put it on another bet, risking losing everything.

 

You make good points - and we should and I have tried to take into account that Gleason is a smart guy with a strong track record and he has more incentive not to blow up than anyone else has in the comapny - so in this whole discussion I have tried to be careful not to say with any certainty that I know for sure, or even with a high degree of probability - that they are going to blow up or have significant distress. Because of these reasons, you are right, Gleason may not be taking excessive risks and he may truly be an extraordinary banker.

 

But as you say I said it is worth examining because the bank has "categorically changed" in some ways. That is indeed what I am saying. They've added $20 billion or so of their $23 billion assets since the recession, nearly all of their assets are in somewhat new-for-them historically high-risk categories of lending, and their acquisitions have accelerated exponentially since that time. So Gleason has done a lot more in every direction in the last few years than in his entire career prior to that. They are the largest construction lender in two large markets, Miami and New York City, and this has happened in just a few years whereas in Gleasons's entire career/Bank OZK's history prior to that - they had not lent a dollar in those places. And they have also changed their funding model to some extent, and have taken on historically riskier, or at least less stable and higher cost, avenues of funding to sustain their rapid growth. So yes I do believe the bank has categorically changed. But, as you will probably say, he knows what he is doing, and he has simply extended the bank further in directions that they have already been going - so maybe there is an argument about the semantics of categorical change - and it is possible that they are just that good and their success will continue, but it is still worth considering with all of this change if it is at least possible that the bank has a different risk profile than at different points in the past.

[Spekulatius]

I really may be missing the point here - I'm sorry if I am.  If the point is that Gleason has been terrific for a long time, so no amount of substantive analysis of his decisions will give us any predictive insight into the bank, then I suppose I just disagree with that.

 

My point is not that his track record is a substitute for analysis.  My point is that his track record and his point in his career are not consistent with the thesis that the bank has "categorically changed" (your quote) from the last recession.  My point is questioning that - why would a successful banker at this point in his career categorically change his bank taking substantially more risk in new/different ways than he has in the past? 

 

He is 63 and at the later stages of his career.  There is no need for "hail mary" risk, and doing so in the midst of a long expansion (following successfully navigating your company through one of greatest recessions), just doesnt make sense to me, and isn't consistent with his past successes. 

 

If you're at a casino, and you've already had an incredible run and turned $1000 into $100,000, and you've been gambling all night and its now 6am, you don't take your entire bank roll and put it on another bet, risking losing everything.

Have you ever been at a casino? The people who turn $1000 into $100,000 would exactly be the kind of people who would want to risk it all again! Why do you think they didn't stop when they turned that $1000 into $10,000 for example?

 

Anyway, not sure how useful that comparison is. I sort of agree with you that it wouldn't make sense for someone like that to start taking massive risks, but at the same time I can see plenty of reasons why it could happen. For example, he wouldn't be the first person to start believing in it's own genius and invincibility after doing a couple of good deals.

 

A gambler wouldn’t stop because he likes to gamble. There are a lot of companies where the managers or owners had no real reason to gamble, but they still did. I think part of the reason is that they do what they do, because they like the game, or because they are full of themselves and believe they are better than anyone else. I think Lehman Brothers is one example of a company that below up, despite fairly high insider ownership. There are countless others.

[jmp8822]

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.

 

Oddball or anyone else on the bear thesis,

 

Can you explain what risk/ how big of a risk it is if a recession doesn't permanently impair their business?  I.e. if what you think is true and they have bad loans when a recession comes, how likely/unlikely is it that they can simply 'wait it out'? I.e. would the Arkansas regulator not know enough/ care enough to force a takeover at a horrible share price (good for bears) if OZRK simply mis-marks the loans for awhile and 12 months later everything is fine again?

 

Just trying to solve how big the 'zero' risk is relative to recession, assuming the loans are indeed very risky and if they could get away with faking it until the recession is over or if that seems impossible, please help me understand why.

[Guest Schwab711]

It might be worth looking into First NBC Bank (FNBCQ). Not saying OZRK will definitely fail but they are similar on the asset and liability side. FNBC failed surprisingly fast. I just started looking at them so I don't have much more to add for the moment.

 

That's the thing with this strategy though. It might look risky but be sustainable. Or it might deteriorate in 1-2 quarters after some mild warning signs. It's hard to tell since loan classification (which may provide some warning) requires trust in management and regulators.

[abyli]

When I am reading the discussions here, why I have the impressions that neither bull nor bear side have the clear knowledge about the books of the bank? Both sides are guessing...

 

So if none of us have clear idea what is on the books of OZRK, what is the meaning of discussions here?

[Spekulatius]

When I am reading the discussions here, why I have the impressions that neither bull nor bear side have the clear knowledge about the books of the bank? Both sides are guessing...

 

So if none of us have clear idea what is on the books of OZRK, what is the meaning of discussions here?

 

You always have to guess about the loan books with banks. The FDIC provides perhaps the best public data, since it is standardized.

 

A bank can‘t legally fake a bad loan into a good loan. A loan is either current or it isn‘t and when it osmotic, it willkommen NPV after 90 days believe. I have also seen banks fail very fast, even though they looked well capitalized. BFSB was one I remember.

[DTEJD1997]

Hey all:

 

OZRK may have an EXCELLENT loan book at this time...almost all loans performing, they are making money and they have some reserves...HOWEVER, if the economy takes a downturn, esp. in NYC and Miami, then I think their loans will be trouble.  High end condominium tower construction in those markets is by definition a risky thing.  Once those projects have trouble, I suspect they will have BIGLY trouble, very fast.  The "50% LTV" will probably get eaten through pretty quickly.

 

I am going to look into this further...but I think buying 6 month out of the money puts might be a prudent speculation.  OZRK will probably do well if the economy does well or breaks even.  Any trouble, and this thing could go down real fast.

 

 

[Spekulatius]

I don’t think an economic downturn is needed for OZRK to get into trouble. I think a downturn in demand for RE in specific areas where OZRK loans are concentrated is sufficient for OZRK to get into trouble.

[oddballstocks]

When I am reading the discussions here, why I have the impressions that neither bull nor bear side have the clear knowledge about the books of the bank? Both sides are guessing...

 

So if none of us have clear idea what is on the books of OZRK, what is the meaning of discussions here?

 

You always have to guess about the loan books with banks. The FDIC provides perhaps the best public data, since it is standardized.

 

A bank can‘t legally fake a bad loan into a good loan. A loan is either current or it isn‘t and when it osmotic, it willkommen NPV after 90 days believe. I have also seen banks fail very fast, even though they looked well capitalized. BFSB was one I remember.

 

That's not entirely true, you can actually get the individual loans they've made.  As well as terms in some cases.  My company aggregates some of this, we have their FL loans, but not NY.

 

You might intentionally make a bad loan if you expect to syndicate it quickly enough.  As I keep mentioning, read about Penn Square Bank.

 

There is a lot of speculation, but you can get to 90% with hard facts if you're willing to talk to people and hunt down data, it all exists.

 

Yes, this could go on for years.  My contention is it gets riskier the longer it lasts.  That's because they aren't learning the right lessons, they have learned that any and all loans are 'good' loans.  They are no different than many banks lending into the early 2000's RE boom in Florida.  All loans are good loans in a boom, until suddenly they aren't.

 

 

The problem from a trading perspective is I don't see anything ending until we get a downturn.  It can be painful to hold, and if you're like most of the market and believe the next recession if 7-10 years away then it will be really painful.

 

[John Hjorth]

Bloomberg BusinessWeek [July 10^th 2018]: How a Tiny Bank From the Ozarks Got Big and Outpaced Wall Street's Real Estate Machine.

 

Outline link to the article.

[Spekulatius]

Hmm, my $35 puts are getting some love today? What‘s the concern with OZRK other than reduced NIM?

[zhengmit]

Not the people that worry commercial real estate crash.  But NIM declines, especially their core spread declining for the first time since the fed raises the rate.  Loan volume is low and management is not sure if 2018 loan vol would be higher than that in 2017.  These have ramifications for estimate in 2019 and 2020.  EPS grew 22% YoY but PTPP/sh grew 5% YoY so slower than most regional banks. 

[NorteCapital]

http://www.arkansasonline.com/news/2018/jul/24/news-in-brief-20180724/

 

98M$ HQ to be built in Arkansas. Interesting.

 

[Shooter MacGavin]

coming to this forum late but I took a long position in this name some time ago.

 

I'm not trying to pick a bone here with the "short" or negative thesis here.  I'm just trying to understand it more clearly for my own benefit.

 

So far, my reads on the punchline here are:

 

1) They are in construction loans in Miami and NYC and that is dangerous.  No other lender is going into it for a reason.

2) And look at Penn Square Bank as an analogy.

 

To generalize that construction loans are dangerous by themselves is too simplistic in my view.  Surely, construction loans in certain projects in certain geographies with certain terms/pricing and certain collateral and well backed sponsors - surely some loans aren't dangerous. In other words, just like we all are finding opportunities in the equities, bond markets, even though "the market is rich",  these guys are stepping in where other lenders are balking, because they believe that if they do construction loans in the best projects (Hudson Yards in NYC for example) at 42% loan to cost, with strong, well capitalized sponsors who take the first hit, maybe they won't lose money in aggregate. Construction loans aren't as a category dangerous. If that were true, there would be no construction in this country.  At some price/terms/collateral/projects they are , and at some price/terms/collateral/projects they aren't.  Just like if you buy a newspaper at 0.5x FCF, you're more likely to do well than if you pay 10x FCF.

 

They've got the track record of credit underwriting so far, correct?  They made a profit in 2009.  How many banks can say that? Unless you think they goosed their numbers and actual equity is impaired?

 

So it's an unconvincing argument to make to say their credit underwriting is aggressive when we're not on the ground making the credit decisions.  If you don't know their particular loans, how can you be so sure they're doing something stupid? maybe they are but I'd love to know how you come to that conclusion, because if you're correct, I'm happy to dump my position.

 

On the Penn Square Bank analogy, I didn't read the book yet although it does sound interesting. but I read some articles.  So I think oddballstocks here is clearly much better informed, but I don't see it as an appropriate analogy.  Correct me if I'm wrong, but Penn Square Bank is more analogous to all the investment banks/subprime lenders churning out CLOs and CDOs and CMOs.  The game of hot potato.  Make the loan and pass on the risk.  It seems more analogous to Drexel Burham Lambert and Countrywide etc.

 

Will revisit as I learn more.

 

[mjohn707]

coming to this forum late but I took a long position in this name some time ago.

 

I'm not trying to pick a bone here with the "short" or negative thesis here.  I'm just trying to understand it more clearly for my own benefit.

 

So far, my reads on the punchline here are:

 

1) They are in construction loans in Miami and NYC and that is dangerous.  No other lender is going into it for a reason.

2) And look at Penn Square Bank as an analogy.

 

To generalize that construction loans are dangerous by themselves is too simplistic in my view.  Surely, construction loans in certain projects in certain geographies with certain terms/pricing and certain collateral and well backed sponsors - surely some loans aren't dangerous. In other words, just like we all are finding opportunities in the equities, bond markets, even though "the market is rich",  these guys are stepping in where other lenders are balking, because they believe that if they do construction loans in the best projects (Hudson Yards in NYC for example) at 42% loan to cost, with strong, well capitalized sponsors who take the first hit, maybe they won't lose money in aggregate. Construction loans aren't as a category dangerous. If that were true, there would be no construction in this country.  At some price/terms/collateral/projects they are , and at some price/terms/collateral/projects they aren't.  Just like if you buy a newspaper at 0.5x FCF, you're more likely to do well than if you pay 10x FCF.

 

They've got the track record of credit underwriting so far, correct?  They made a profit in 2009.  How many banks can say that? Unless you think they goosed their numbers and actual equity is impaired?

 

So it's an unconvincing argument to make to say their credit underwriting is aggressive when we're not on the ground making the credit decisions.  If you don't know their particular loans, how can you be so sure they're doing something stupid? maybe they are but I'd love to know how you come to that conclusion, because if you're correct, I'm happy to dump my position.

 

On the Penn Square Bank analogy, I didn't read the book yet although it does sound interesting. but I read some articles.  So I think oddballstocks here is clearly much better informed, but I don't see it as an appropriate analogy.  Correct me if I'm wrong, but Penn Square Bank is more analogous to all the investment banks/subprime lenders churning out CLOs and CDOs and CMOs.  The game of hot potato.  Make the loan and pass on the risk.  It seems more analogous to Drexel Burham Lambert and Countrywide etc.

 

Will revisit as I learn more.

 

I don't have any opinion on this topic, but I keep hearing people talk about the Penn Square Bank failure in relation to OZRK but I don't think Penn was all real estate related, more of a oilfield thing just from memory.  There was a book written about an Irish bank that was specifically involved in construction loans and had a tough time during the financial crisis, think it took down the richest man in Ireland at the time too: https://www.amazon.com/Anglo-Republic-Inside-broke-Ireland-ebook/dp/B005IP4SKK/ref=sr_1_1?ie=UTF8&qid=1535148786&sr=8-1&keywords=anglo+irish+bank  I think the book was readable and did a decent job of describing the situation and the eventual losses in the portfolio, which were some of the highest I've ever heard percentage-wise, not that I'm particularly well versed in bank failures other than having read the same bank failure books everyone else has

[Shooter MacGavin]

thank you

[topofeaturellc]

The comparison to Penn Square is mostly about wholesale funding to grow project lending at super high rates.  If you think about it lending on O&G reserves and lending on prospective real estate projects isn't actually that different.  You put the money upfront beting on cash to amortize the loan from the liquidation of the asset.

 

Fundamentally it comes down to how good a job you did of getting positive selection on the projects, because you know one day it all rolls, and you just want to survive. Ordinarily the guy growing faster than everyone else isn't the guy with positive selection. And then you double down on that because of how it's funded.  Ie if you had deposits and capital maybe you survive, but if you're deposits run its over.