OZRK - Bank of the Ozarks

[IanBezek]

As a thought experiment, if you own OZK, why would you prefer it to TFSL, at 6.8% dividend yield, 0.5 TBV, under 10x earnings, with an extremely conservative loan book? How much is growth in aggressive commercial lending worth? (Disc: I own a lot of TFSL)

[rawraw]

This thread has gotten much more thoughtful than when it started (and when I was also prohibited of talking bank stocks).  Figured I'd contribute some thoughts now

 

Here is my take.  I'd love to get oddball's (or anyone else's opinion).  I'm mostly concerned with credit - the bank is too cheap for me to really worry about margin (it's important, yes. But I think credit is the driving force here)

 

What do we know?

 

1) We know Ozark exhibits similar risks to a very typical type of bank that grows C&D lending and then fails

2) We also know that Ozark's C&D lending is not typical for the banks we've used to construct our hueristics on #1

 

I think even Oddball agrees with #1 and #2.

 

The question for me is how different is the C&D lending from the typical bank.  Being a former bank examiner, I've looked at  a lot of loan portfolios.  And while I never directly examined Ozark, everything I have heard from various sources around the bank, including the bank itself, clearly explains that these deals are not typical.

 

One thing that is confusing for non-bank people is when Gleason talks about the borrower's putting in 50% cash in the deal.  When I first started covering Ozarks, I was 100% in Oddball's camp.  Nothing about the story made sense.  The biggest thing to me was this - if these loans are 50% LTV, what real estate developer in the world would take those loans?  This didn't make sense to me and this was before OZK publicly discussed the details of RESG. I would ask everyone to explain why OZRK was some magical bank immune to the risks I saw and no one could answer.

 

Then one day I was digging in some tax filings and found an OZK loan that applied for a tax credit. Because of this, they had to disclose more about the structure. That is when I learned that the borrowers aren't actually putting 50% cash in literally - they are taking out debt subordinate to OZRK and using that as part of the down payment.  This is like borrowing money to put down money for your house.

 

So what does this mean?  Well all else equal, this should improve OZK's loss given default (LGD).  But it doesn't mean that the probabilities of default (PD)  are different, because the borrowers are probably still leveraged like typical construction borrowers.

 

So when we think of #2, here is one difference. LGD on RESG loans should be lower.

 

That is great EXCEPT that good ol' George is making $500mm loans WITHOUT sharing the credit risk with other banks (syndication or participation).  When you are making loans that represent nearly a quarter of your capital, even a low LGD can have an economically meaningful loss.

 

So, when we think about #2 - we have lower LGD, higher concentrations.  Great.  Which offsets which?  Well that is definitely a meaningful variable, but let's hold off on that for now.

 

Then I ask myself, what did we learn new this quarter?  If we are Bayesian processors, we can't get emotional or just assume the shorts are right about RESG bankrupting the bank.  If I take a step back, Ozark has always talked about LGD. And any bank investor should understand the offset of the concentrations.  And this quarter, we witnessed results that are exactly consistent with that strategy.

 

As a side note, someone is talking about 2007 credits just going bad as a good thing earlier in this thread.  The nature of C&D loans is that they are short term in nature.  The fact that these loans still exist is prima facie evidence they are distressed.

 

One thing we did learn, which is amazing BTW, is the age, size, and LTV of the RESG portfolio.  To me this is huge - typically bad loans keep going bad and as public investors, we have little visibility into the "pipeline" of bad loans. When inside a bank, you could do more sophisticated analysis based on a loan review.  Disclosures for banks should be better on this front, but Ozark has given us good information on this.  So unless we are being deceived, we have much better visibility into the potential future issues on these large loans that could kill this bank.

 

We see some older loans, which are likely struggling.  But most have decent collateral coverage (of course this collateral coverage will change when a struggling project is reappraised with new assumptions).  But we can use this information to judge potential losses.  We only see one real concern, which management highlights.

 

Now let's circle back to concentration.  While there are a TON of risks for this bank making $500 mil. loans, what are the benefits?  Well, if you've ever performed a loan review on a bank like this, there is something that is interesting.  While the impact of something going bad is way higher, there is also an ability for management to know what is actually going on due to the limited number of borrowers.  And while negative swings have huge negative impacts, positive swings have huge positive impacts.  I've been in a bank once that had their adversely classified ratio drop from a failure candidate to pristine based on a couple of credits.  What does this difference in their C&D mean?  Well, it means you there is a trade off - if management being more informed and involved outweighs the risks, then it can be good.  But this requires a lot of trust - which is typically deadly for a bank.

 

What does this trust difference mean?  It means that changes at the top are very risky.  We have had a change in RESG leadership.  The question for me is how much was that guy responsible for risk management separate from Gleason?  My understanding from everyone I've ever spoken with is that Gleason is always on top of credit. Compared to most CEOs, Gleason is one of the best at knowing a loan before he is coached to know about it.  Unfortunately public investors don't get much insight into this since loans we learn about are also loans they've been coached on.  Unless you find something in public documents that management doesn't know you'll ask about.

 

Also, growth slowing - I think this is a great sign.  OZRK's RESG has been slowing for a while now and management does not seem happy about this.  This, to me, is inconsistent with a lender just making a ton of bad loans and trying to keep margins and EPS growing.  Yes, the out of territory lending normally a huge red flag.

 

So in summary,  here are my takeaways:

 

1) Do I think we witnessed some level of risk that is inconsistent with prior messaging?  No.  As a percentage, this isn't even the highest quarterly loss for RESG. 

2) Did we learn anything that makes our understanding of the risk improve?  Yes, we have great visibility into the entire portfolio relative to most bank disclosures.

3) Do I still trust management?  On the call, Gleason was not defensive or upset.  He seemed defeated to me.  This was consistent with what I'd expect and want.  If he behaved like BOFI's management or Elon Musk, my trust would have changed drastically.

4) Did my expectations change on the performance of RESG through the cycle change?  No. I haven't seen any information related to this.

 

Honestly, there are some public banks that I think are much riskier than OZRK (cough EGBN cough, although they did decline somewhat after the potential management fraud stuff came out).  I don't follow the bank sector as closely as I used to (I work in private markets now), but my impression is a lot of the CRE banks are still trading better than OZRK.  This seems inconsistent to me.  Humans have a bad habit of conflating the observation of risk vs. the existence of risk - and the observation of risk is a useful data point to evaluate the existence of it.  But a lot of these CRE lenders, especially in the Northeast, have a lot of risk.  But it doesn't seem like the market is evaluating all the banks equally.

 

 

Anyway, I could write novels on Ozark.  But figured this is a good start.  Welcome any feedback

 

Also,  I wouldn't waste my time on a sum of the parts analysis of OZRK.  If RESG is valuable, the bank lives.  If RESG blows up, it will be the FDIC selling the assets and not Gleason.  Sum of the parts doesn't make much sense to me in bank investing under these sort of scenarios.

[rawraw]

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.

Why would capital increase? Are you talking about risk weighting?  I am out of the markets now, so I haven't paid close attention to changes in HVCRE rules.  But I think that is what you'd need to look into - what the current risk weights are now for these loans.

 

A borrower will not walk away unless the loan is a non-performer.  Think of it this way - you own a house worth $100.  Will you just walk away when the bank has a claim against that house for $80?  No.  You'd sell the house and keep your $20.  You only walk away when the house is worth less than $80.  And since the bank isn't making loans greater than 100% LTV, it just means your initial appraisal was wrong or needed to be updated due to changes in the environment.  So I would just assume all walk aways are NPLs

 

When we think of the risk of loans, we think of Expected Loss = Probability of Loss times Loss Given Default times Exposure at Default.  The loss on a loan (eats at capital 100%) is going to overwhelm the capital allocation to past due loans (50% times 10%).  But it is a good point

[Guest Schwab711]

Great posts rawraw. Couple things:

 

1. Can you share the documents you found that show the unsecured loans some projects receive? I'm interested in what they look like and how you found them for future reference.

 

2. Back to the house example, say OZK lends $80 for a $100 house (80% LTV). But, the borrower financed $10 from a different bank to fund 1/2 of the equity/downpayment. Then the true LTV is 90% from the POV of the borrower (50% higher than OZK is showing us). It seems the projects OZK lends to may not be as well-capitalized as portrayed. OZK still has a 2:1 collateral:loan ratio, but the likelihood they are put the collateral is much higher than the let on. I'm not sure how this can be interpreted as a better outcome than only lending to projects with 50% LTV. Especially since the loans are generally non-recourse and this type of lending is generally made to some type of SPV.

 

This reminds me of when the CEO had a presentation a year ago and he provided a misleading state about the IRR of builders.

[abitofvalue]

Sounds like its just a 50% LTV because Ozark is more senior in the capital structure. Arguably - if someone else was willing to be the junior note - i.e. take the 50-80% risk that should increase confidence in Ozark's underwriting as it indicates others thought the property value was even higher than Ozark.  IIRC that's pretty much what BXMT etc do too. If you are short Ozark because you have better loan data than the market - seems like the real money would be in shorting the junior noteholders.

 

Might also explain why they dont need to syndicate the loans and just hang on to them. Banks will often do a 70% LTV loan and then syndicate to reduce their exposure. Here the exposure is reduced strucutrally at origination.

 

 

 

[AdjustedEarnings]

Thanks rawraw, oddball, and others for the responses.

 

Rawraw,

 

"But it doesn't mean that the probabilities of default (PD)  are different, because the borrowers are probably still leveraged like typical construction borrowers"... and.. "As a side note, someone is talking about 2007 credits just going bad as a good thing earlier in this thread.  The nature of C&D loans is that they are short term in nature.  The fact that these loans still exist is prima facie evidence they are distressed."

 

Yes, as to the C&D loan (one of the loans was not C&D and was, in fact, a longer term loan on an income producing property) that is exactly my point. The C&D loan was longer term as well from what management has said (for it to perform to terms until now, the maturity couldn't have been earlier, as there was no TDR on these).

 

Still, if we leave that aside (because if the project sold better, it'd have had refi long ago, so your point still stands), most of their C&D are supposed to be short term (18-36 months). Two things happen, as you know. Either the project is finished and gets permanent financing or it doesnt fails. Most of the time, when it fails, developer walks. My point in saying that the loan originated in 2007 and performing until 2018, is not to point out that it was a strong credit. Rather, the developer stuck with the deal and did not walk for a long time even when things went south. Also, there was no TDR on this loan. So, whereas questions are often raised about how good is their structuring really? And does their process really work? Do developers have skin in the game? etc. I think this data point supports management's assertions. That's all.

 

To others' questions on sub debt:

 

As to the subordinated loans, I think the fact that they do this is well known. Developers don't generally put 50% equity into their deals. Two things to consider here. One, the developer has funded and the sub debt has funded before OZK funds. Yet, only OZK has a lien. Second, because of their position, the subdebt may well require a personal guarantee from the developer, even where OZK does not.

 

Yet more...

 

OZK occupies a space between an opportunistic financer and a traditional bank. Their cost of funding, while higher than other banks, is not higher than non-banks. Their assets are less diversified, higher yielding, and opportunistically acquired, all of which (rightfully) makes traditional bank investors nervous. It's basically opportunistic investing with low(er) cost of funds than their true competitors (which are not other banks). So whether you buy the stock or not depends on whether you think their investment skills are going to work in the market place.

 

Three examples...

 

1. After the GFC, OZK loaded up on long dated munis at great yields (btw, Buffett did the same). To traditional bank investors, this was way too concentrated, ignored asset-liability matching, etc. etc. They made a killing on these munis, which were financed with 1% deposits. So it was a huge positive as it turned out, though it could've turned out badly as well.

 

2. Also, after the GFC, they acquired a ton of banks. To traditional bank investors, that much growth is cause for concern. I understand that. But they're being opportunistic too. They did not make large acquisitions in the 1998 to 2006 period, when everyone else did. I think this gets forgotten. After the tide went out, they cleaned up. The market appreciated this for a while. Now the sentiment has changed.

 

3. Same with C&D loans. The environment where others failed while doing this was not one where all their competitors had pulled back. Today, every analyst, every large bank CEO, every media person warns about CRE and RE in general. Isn't it a bit odd? Where were these warnings in 2006-07 on this scale? Are they present today because everybody has become smarter on RE? Or are people so deeply scarred from the GFC, that all real estate looks bad after a price rise? We've literally had RE bubble warnings since 2013.

 

(In my view, the real bubble today is in Venture Capital, though this is a different issue. You can see my blog post on this, if you wish.)

 

So I think a lot of the debate surrounding this name depends on whether you believe Gleason can continue to invest well. It's C&D now, it was FDIC assisted transactions before that, it was munis before that, it was traditional loans before that, etc. Things will change.

 

It's not a good comparison, but I'll make it anyway: Anything you could say here you could've said about Berkshire in its early days: Concentrated (v/s traditional insurers diversified), investments were a large % of capital, lots of acquisitions, opportunistic, using leverage (float there, deposits here) to make investments, etc. Traditional insurance players probably said "this warren guy is going to blow up."

 

To be fair, many other insurance 'warrens' did blow up (and are still blowing up today). We don't know them because of survivorship bias. So it really depends on do you think management can continue to execute as they did historically. I don't think traditional bank investors and investors in OZK will ever view this through the same lens and it is not because one side is right and the other wrong. They're just looking to bet on different things. This is why most banks earn 10% +/- ROEs and OZK higher. Same with BRK and other P/C in the early years.

 

Please don't crucify me for the BRK comparison. It's not the same situation but I'm trying to make it to show why people with different perspectives will view things differently.

 

Sorry this is so long. I feel like Mark Twain: “I didn't have time to write a short letter, so I wrote a long one instead.”

[rawraw]

To others' questions on sub debt:

 

As to the subordinated loans, I think the fact that they do this is well known. Developers don't generally put 50% equity into their deals. Two things to consider here. One, the developer has funded and the sub debt has funded before OZK funds. Yet, only OZK has a lien. Second, because of their position, the subdebt may well require a personal guarantee from the developer, even where OZK does not.

Yes, it is well known now.  But when I found the tax stuff, it was not - I actually wanted to publish research on it, but Gleason asked that we didn't because he didn't want it out there.  As RESG has gotten more heat, OZRK has increased their disclosures on how things actually work there. But despite this, it sounds like most investors do not believe them (which is fine, it comes back to my piece on trust).  I know he is no longer there, but everything the former head of RESG said made sense the one time I heard him in front of a group of investors.  He essentially stressed that while some of their loans are complex, the risk management really comes down to being unwavering on the basic fundamentals of construction lending - such as monitoring draws, staying on top of expenses relative to the budget, etc.  They are able to really dedicate resources to follow these things closely because of the concentration - and lots of lenders are not as religious about these controls around C&D  lending.  He even said at one point that nothing they did was special - it was just they did the basic stuff a lot of lenders skip on, since normally it greatly increases overhead on a very granular C&D portfolio.

 

Great posts rawraw. Couple things:

 

1. Can you share the documents you found that show the unsecured loans some projects receive? I'm interested in what they look like and how you found them for future reference.

 

2. Back to the house example, say OZK lends $80 for a $100 house (80% LTV). But, the borrower financed $10 from a different bank to fund 1/2 of the equity/downpayment. Then the true LTV is 90% from the POV of the borrower (50% higher than OZK is showing us). It seems the projects OZK lends to may not be as well-capitalized as portrayed. OZK still has a 2:1 collateral:loan ratio, but the likelihood they are put the collateral is much higher than the let on. I'm not sure how this can be interpreted as a better outcome than only lending to projects with 50% LTV. Especially since the loans are generally non-recourse and this type of lending is generally made to some type of SPV.

 

This reminds me of when the CEO had a presentation a year ago and he provided a misleading state about the IRR of builders.

 

On #1, I do not have them anymore.  For the banks I follow, I read a lot of obscure local newspapers.  One newspaper talked about the OZK development at a level of detail where I knew the journalist had good information.  So after I read that, I went and looked for data on that development. I think I actually emailed the journalist as well and he provided me some documents he had requested.

 

On #2, we have to be very clear  here about who has what risk.  At the end of the day, what we care about is how much would OZK need to charge down these loans and how does that compare to earnings and capital.  Charging these two loans to 80% seems conservative to me.  And even in this situation, we did not eat through earnings.  So when I think about risk, the risk I ultimately care about is net losses OZK will incur.  And it matters a lot if their C&D book is in a first loss position at 90% loan to cost (more typical C&D type lending) or it is at 50% loan to cost.  When we think of our heuristics and base cases for how C&D lenders perform, this is a huge change in the economic reality of the potential losses.  As long as we aren't being mislead or missing something (part of the reason I engage in these sort of discussions).

 

As a side note on the charge offs this quarter - since they are distressed, these are likely based on new appraisals.  And normally most banks (again,you wouldn't have the disclosures to know this) charge down assets to collateral less cost of sale.  The fact OZRK did 80% is notable to me.  Not sure if management has addressed it directly, since I missed half the call.

 

Would I prefer loans that are actually 50% loan to value from both the borrower and lender?  Yes.  But, I  am just focusing on how this stuff is different than typical C&D lending.  In C&D lending that blows up banks, it is often very speculative deals where the value is greatly in excess of cost.  The classic example is a golf course - we buy the land for $1 mil. but the golf course is appraised to be worth $10 mil. when finished.  We lend $2 mil.  to build the golf course but never actually make progress.  Now we have $2 mil. outstanding on collateral of $1 mil.  Loan to value of 10%.  Loan to cost of 200%

 

We also need to be careful about loan to value and loan to cost.  While loan to value is often spoken about, it is often the one most subject to including $10 mil. golf courses in the number.  While loan to cost includes the cost paid for real estate, we still have an approximation (less any reduction due to a downturn) what that collateral is worth before we do anything.  Less hopes and dreams - I can make any C&D loan look like it has a good loan to value with lots of optimism and a few critical appraisal assumption tweaks.

 

So I didn't mean to imply  that OZRK's 50% LTV construction loans are the same regardless of the existence of sub debt (they could be similar, I'd have to think more about this).  But what I'm saying is most banks we see with concentrations of C&D portfolios do not have this buffer built in. Small changes in the final value immediately start to impact the lender's loss position.  Would I rather a company have 50-100% of capital in regular C&D loans or have 200-250% of capital in C&D's loans structured like OZK?  The argument over this point is just an estimate of the inputs for the LGD, PD, EAD assumptions. Oddball and I probably would pick different numbers.  But that doesn't negate the point that this is stuff to think about, which I honestly do not believe most investors are.

 

Not all loans are created equal.  People seem to be assuming OZK loans are bad because from the data we see (geographic dispersion, large, condos, etc), they have similar characteristics.  But the structure of loans matter for performance as well.  Unfortunately as public investors, we don't get to review the loan documents governing this.  But you can make loans to distressed companies or risky endeavors and still mitigate your risk if the structure is correct.  I  believe that Gleason is religious on structure (partly because he is a former lawyer).  He can give up bps on loan yields,  that is fine for me.  But if I ever saw him giving an inch of structure, that is what would alarm me.  This could be happening and it is hard to measure from my seat. But this is what I continually look for in the short calls and I haven't found any information to update my priors yet.  All I see in the short calls are growth rates, interest reserves, etc. 

 

Structure changing before I can see it changing is the big risk to me - hence why trust is key in this, which as a bank investor, I never do.  We will see if I learn my lesson or not on this one.

 

 

Still, if we leave that aside (because if the project sold better, it'd have had refi long ago, so your point still stands), most of their C&D are supposed to be short term (18-36 months). Two things happen, as you know. Either the project is finished and gets permanent financing or it doesnt fails. Most of the time, when it fails, developer walks. My point in saying that the loan originated in 2007 and performing until 2018, is not to point out that it was a strong credit. Rather, the developer stuck with the deal and did not walk for a long time even when things went south. Also, there was no TDR on this loan. So, whereas questions are often raised about how good is their structuring really? And does their process really work? Do developers have skin in the game? etc. I think this data point supports management's assertions. That's all.

 

...

 

To be fair, many other insurance 'warrens' did blow up (and are still blowing up today). We don't know them because of survivorship bias. So it really depends on do you think management can continue to execute as they did historically. I don't think traditional bank investors and investors in OZK will ever view this through the same lens and it is not because one side is right and the other wrong. They're just looking to bet on different things. This is why most banks earn 10% +/- ROEs and OZK higher. Same with BRK and other P/C in the early years.

 

 

I think all of your reply is great.  I would just add that OZK is also very strict on expenses - so the outsized return isn't all from the assets.  We would have to make some assumptions on expense creep if they no  longer did RESG (therefore have more granular portfolio), but even as a normal lender this bank probably does OK profitability wise assuming credit costs are industry level

[NBL0303]

 

Not all loans are created equal.  People seem to be assuming OZK loans are bad because from the data we see (geographic dispersion, large, condos, etc), they have similar characteristics. 

 

 

I appreciate your posts rewraw and have found them interesting and insightful - thanks for sharing your wisdom.

 

I would like to share one perspective regarding your statement above from one of us that has been skeptical of OZK and/or buying puts. Us shorts or OZK skeptics do not believe that "all loans are created equal." So I disagree with your statement that we "are assuming OZK loans are bad because from the data we see they have similar characteristics" [as other lenders that are risky or have blown up]. We are skeptical of OZK's loans specifically. Some of the specific large loans they generated is actually what initially completed me to look into this further as a potential short option. We are not saying, or at least I am not, that C&D loans are all much more inherently risky than all other categories of loans, nor that there is not a way to aggressively lever up with C&D loans in a way that makes sense. Rather, we are skeptical that OZK has successfully expanded their lending so heavily in this area without taking on inordinately and not adequately compensated risks. There are many specific loans on OZK's books that I find extremely risky. Additionally, I also have a broader level of skepticism towards their strategy of aggressively expanding their C&D lending in Miami and NYC during the last few years - because those markets have lots of C&D lenders, are very competitive, and many of OZK's loans in those markets were passed on by literally every other C&D lender in those markets. This last point does get closer to your statement that we are skeptical of OZK because of broad categorical considerations - but my point is that it is the specifics of OZK's lending and some of its specific loans that cause me to believe it is an extremely risky bank.

 

I'm not saying my thoughts are correct by the way, I'm just sharing my own judgment on matter. I have really appreciated the thoughtful back and forth on this one.

[AdjustedEarnings]

 

Not all loans are created equal.  People seem to be assuming OZK loans are bad because from the data we see (geographic dispersion, large, condos, etc), they have similar characteristics. 

 

 

I appreciate your posts rewraw and have found them interesting and insightful - thanks for sharing your wisdom.

 

I would like to share one perspective from one of us that has been skeptical of OZK and/or buying puts regarding your statement above. Us shorts or OZK skeptics do not believe that "all loans are created equal." So I disagree with your statement that we "are assuming OZK loans are bad because from the data we see." We are skeptical of OZK's loans specifically. Some of the specific large loans they generated is actually what initially completed me to look into this further as a potential short option. We are not saying, or at least I am not, that C&D loans are all much more inherently risky than all other categories of loans, nor that there is not a way to aggressively lever up with C&D loans in a way that makes sense. Rather, we are skeptical that OZK has successfully expanded their lending so heavily in this area without taking on inordinately and not adequately compensated risks. There are many specific loans on OZK's books that I find extremely risky. Additionally, I also have a broader level of skepticism towards their strategy of aggressively expanding their C&D lending in Miami and NYC during the last few years - because those markets have lots of C&D lenders, are very competitive, and many of OZK's loans in those markets were passed on by literally every other C&D lender in those markets. This last point does get closer to your statement that we are skeptical of OZK because of broad categorical considerations - but my point is that it is the specifics of OZK's lending and some of its specific loans that cause me to believe it is an extremely risky bank.

 

I'm not saying my thoughts are correct by the way, I'm just sharing my own judgment on matter. I have really appreciated the thoughtful back and forth on this one.

 

NBL0303, thank you for your post! Would you please give some examples for the benefit of the group? I've heard this argument too but have not been able to find any specific names/credits. It's very possible that I am (and others are) wrong in the analysis and your input with the specific names you refer to would greatly help before it's too late. Thanks!

 

Rawraw, I do agree 80% of new appraisal is conservative. When I did credit file reviews (years ago), banks used to simply do collateral value less costs to sell plus any proceeds from structural guarantees, setoffs, etc. It's also true, that you can chew through 20% rather quickly, so it comes down to the quality of the appraisal. If that is good, I think 80% signals George's head is in a good place.

 

All, one additional observation that did occur to me is the timing of moving these credits to substandard/weak sort of lines up with Dan Thomas leaving. I'm wondering whether they let him go because of it (doubtful), or whether George decided to move these buckets after he dedicated more time to RESG (as he said at the time he did). Just a thought that occurred to me.

 

In my last post, I referred to my blog article without posting a link. Several people messaged me on twitter, so here it is:

 

https://adjustedearnings.blogspot.com/2018/10/my-last-memo-on-vc-bubble-now-is-time_13.html

 

 

 

[rawraw]

 

So I disagree with your statement that we "are assuming OZK loans are bad because from the data we see they have similar characteristics" [as other lenders that are risky or have blown up]. We are skeptical of OZK's loans specifically. Some of the specific large loans they generated is actually what initially completed me to look into this further as a potential short option. We are not saying, or at least I am not, that C&D loans are all much more inherently risky than all other categories of loans, nor that there is not a way to aggressively lever up with C&D loans in a way that makes sense. Rather, we are skeptical that OZK has successfully expanded their lending so heavily in this area without taking on inordinately and not adequately compensated risks. There are many specific loans on OZK's books that I find extremely risky.

I apologize, I haven't been clear. I am not talking about anyone specifically - I am using the word investor very generally.  Based on when I used to talk a lot to the bank focused funds and generalists, I got a feel for what they were and were not paying attention to. This is what I'm mostly referring to.

 

I don't want you to give away your secret sauce, but how are you deciding that loans are bad?  There are scenarios where you can get better structure on a loan because there isn't any competition.  You don't trust Gleason and I do; that is something we will not be able to really analyze.  I'm more interested in what data points you are using to determine it is a bad loan.  Surely if the loan is rejected by everyone but Ozark gets the loan CD secured, you  would agree its OK even if its a bad project.  This is of course not happening, but it is an example of how bad borrowers are only a approximation without seeing the actual loan documents and structure (which you may have done, I do not know).  But any specifics you can share would be very useful to me in trying to update any priors (if necessary) :)

 

And C&D loans are wayy more risky than other loan types. The base rate for banks with concentrations like Ozark is not very good through a down market.  There level of C&D loans would imply a very high base rate of bank failure.

[Guest Schwab711]

Thoughts on OZK:

 

1. First, my point on the 50% LTV vs walk-away point is truly just that. It's the amalgamation of evidence that worries me about OZK. Normally, only lending to the senior tranche of a risky project would be prudent for a bank. Build/enhance relationship and get solid, above-average interest. However, OZK is predominately providing non-recourse CRE or condo/1-4 mult loans in NYC/Miami, and to a lesser degree, LA. No one thinks these markets are cheap. I work in valuation/appraisal business and some of the RE appraisals I see make me wonder how rosy the C&I appraisals are. At least for already built RE, there's a NOI and you can adjust the cap rate the appraiser does as the bank. The development appraisals get trickier because how do you know what the sales schedule will be, if there will be construction delays in 2 years, financing increases, ect. The macro economy, interest rates, foreign investment in RE, ect all play important factors in demand. This is all somewhat odd because for the entire 20% compounded era for Gleason, they did business in Arkansas and Texas. That's your historical data. In 2014 alone, lending in NYC jumped from $320m to $1,600m. NYC RE went from <10% to 21.5% of their loan book. 4 years before that, they had never originated a loan in NYC before.

 

I once worked at a very large midwest bank. They had operated since before statehood. They had something like 40% of the deposits in the state. Everyone loved them and they earned 15%+ ROE for two decades. They were running on all cylinders. Then some hotshot CEO bought a bank in FL and we started lending to FL and AZ like crazy. Those two banks took down the massive, conservative midwest bank holding company. They had no business being in FL or AZ at that scale, that quickly.

 

Another example from history is Hudson City Bancorp. They grew through the GFC and were famous for being the largest bank in the US that didn't take TARP money. Then 2 years later they took a $2b charge. Then their funding was too expensive relative to peers and profits started to fade. Then loan performance started to fall like a rock and M&T Bank had to rescue them.

 

That's my point on NYC/Miami/LA. OZK doesn't have the historical data or expertise in these areas like they did in AR/TX. Beyond that, OZK's margin profile (solely due to Gleason's shoot-at-the-hip style and refusal to take warnings from the Fed on rates) means that OZK is going to see declines in PPNR, if everything goes perfect. OZK is maxed-out on CRE concentration. They are maxed out on L:D ratio. If they try to pull back on L:D, PPNR will tank. They are trying to dilute CRE concentration (supposedly their bread-and-butter and what we are all paying for) with indirect RV/marine loans. They have self-forced themselves out of the underwriting game! When the non-purchased loans run-off, NIM is going to be 3% ish, at best. Even that means lot of RV/marine/consumer loans though. OZK can't profitably originate a dang mortgage so how are they supposed to attract consumer deposits? They are winning what commercial deposits they have by offering non-recourse loans on low cap rate (aggressive) appraisals for construction. Gleason is a gunslinger and I'd prefer something else running my bank.

 

2. As to examples of actual loan performance, here's an article on their Miami lending. What scares me about Gleason is when he implied on a CC that he's conservative because he doesn't make the maximum allowable loan. That's... not really the definition of conservative.

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

 

First, OZK is the largest C&I lender in Miami. That's crazy they outdo a bank 100x larger than them (and outdo shadow lenders that don't have risk capital calcs to worry about).

 

Second, this article shows OZK's largest loans. They made their largest loan in 2016, after the Turnberry Club project had already started. At the time of the loan, 40% of condos had been sold and construction was planned for 2017. After OZK gets involved, construction is delayed and only 10% more sales are made.

https://miami.curbed.com/2016/11/16/13624278/turnberry-ocean-club-breaks-ground-sunny-isles

https://www.prnewswire.com/news-releases/turnberry-ocean-club-residences-announces-50-sales-milestone-as-the-project-goes-vertical-300593402.html

 

Construction is moving at a reasonable pace and might be finished at the end of 2019. But with higher rates and low sales, there's a possibility this loan gets impaired. There's more loans like this in Miami and NYC. I haven't looked in to LA, but I imagine we'll find the same type of stuff. The national condo index peaked in March 2018. For major cities, it seems to have happened slightly before. Liquidity and foreign money is declining for these properties.

https://fred.stlouisfed.org/series/NYXRCSA

 

I'll write more later but that is my response to some recent comments. I think you are buying a beehive with OZK. There are a few banks with similar CRE exposure, but less concentrated, more non-interest income streams, and cheaper funding. I think OZK is going to dilute the heck out of current investors at some point.

 

 

Edit:

Also,  I wouldn't waste my time on a sum of the parts analysis of OZRK.  If RESG is valuable, the bank lives.  If RESG blows up, it will be the FDIC selling the assets and not Gleason.  Sum of the parts doesn't make much sense to me in bank investing under these sort of scenarios.

 

I think the point I was making is being missed. If you are truly only interested in RESG then there's no sense buying OZK now since RESG originations will be declining for several Q's. CRE exposure is too high right now. They have to loan because they have variable funding, so L:D can't decline with CRE exposure. RESG is handcuffed for at least another year and the rest of the bank is commodity lending or below-average crap. That's my point on the quasi-SOTP view of OZK. That gets to one of my other points that now OZK has vintage risk with CRE because of their poor rate management. It's just one more angle to look at the bank.

[AdjustedEarnings]

Schwab711, Thanks for providing the articles. I had seen the one with Gleason's caricature as Midas before, but not the other two specific to Turnberry. If I'm reading them correctly, it'd appear the timeline of events is:

 

Nov 2016: Turnberry project launched, broke ground @ 40% pre-sold.

June 2017: OZK lends money after 7 months of diligence.

Feb 2018: They're at 50% pre-sold.

 

Some observations on the above.

 

Never-Ozarkers might say, "Obviously, if OZK did 7 months of diligence and the borrower found nobody else, then OZK is doing loans no one else will do and that's bad because everyone else knows Miami, NYC are bad markets and were so last time. They are topping, C&D banks fail, etc."

 

Always-Ozarkers might say, "7 months of diligence shows you they are not just lighting money on fire. Yes, they are putting all their eggs in one basket, but they are watching it better than banks that do a ton of syndication, etc. When did doing exactly the same thing that everyone else does assure success? Just look to 2006-07."

 

Gleason will probably say, "Look, at 40% pre-sold @$300mm+ our was money good before when we originated the $250mm loan, let alone funded. At funding, pre-sales were are 50%. This is why our loans are paying down faster than we'd like."

 

And I do think all the observations are correct frankly. It comes down to what probabilities do you assign, what you believe, and who do you trust? My only object with some of these articles on the internet about OZK (there are positive ones too btw, which don't get much run in value circles), they are always too general... "OZK does C&D, that didn't work in 2008, history of C&D growth is bad, Florida real estate fares worst in recession, so they'll fail" or, for the other side, "Gleason is a genius, he aced his bar exam, etc." Even the popular short seller who has made a presentation did not provide the structure/pricing of a single bad loan. (I believe they also had covered their short a while back). If you look at the extent to which these guys go to interview customers, competitors, etc. on their shorts, you'd think you'd find at least one. I'm not saying short case has to be wrong, but it has to be proven better (in my view).

 

The latest bubble chart in management commentary shows much of the lending from 2010 recovery onwards has been repaid and the outstandings are now 2015 onwards. So the short bet becomes one on bad loans having been made (and/or liquidity issues) after 2015. I'm willing to believe it but I'm just looking for an example (e.g. Philidor in VRX). For at least one person to say, "this is the building, this is the structure, this is why the loan won't be paid back. It's 10% of capital, so OZK is toast." These details are not hard to find for investigative journalists and short sellers. And just one is enough to shut the case and go short. But generalizations won't do (at least for me). Proving the positive is harder ("all loans are good and this is why") because you'd need info on every loan (v/s just one) to make this case, though we can surmise something from the historical numbers, which would tend to paint a better picture than the market is giving credit for.

 

Here are two articles which give some insight into their lending as well, this time positive:

 

A developer who has taken out loans from the bank confirmed that Ozarks meticulously and thoroughly monitors progress on the projects it finances.

 

'It's like getting a proctology exam every month,' the builder said. 'But if you're a depositor or an investor, that's what you want.'

 

https://www.crainsnewyork.com/article/20171003/REAL_ESTATE/171009988/why-does-an-arkansas-bank-determine-the-health-of-nyc-hotel-and-residential-construction

 

This one provides a bit in the way of numbers:

 

https://commercialobserver.com/2018/01/sam-chang-scores-121m-construction-financing-package-for-chelsea-hotel/

[Guest Schwab711]

If someone had a specific example like you talk about, they wouldn't share it on cobf. That much has proven true over and over in these long vs. short threads.

 

I get your generalized short thesis concern, but a similar info gap on private projects exists that makes it very difficult to show a terrible loan, even if one or more existed. I think you underestimate how time consuming and difficult this research might be, if it's even possible. Often it is not. You are setting a line in the sand that may be unreachable. All we can do is gather more info and continue to distill it. Hopefully, we can recognize positive trends (or negative from your pov), even if they counter your original belief.

 

Issues I have with the long thesis is that no one (at least in this thread) seemed to recognize that NIM would decline as much or for as long as it did. That RESG originations would decline as sharply as they did (or connect it to the CLO leaving). Those make me think the original long thesis was incorrect. I'd also note that no one knew about Turnberry Ocean Club and this was easily trackable. No one mentioned that the UST placed additional buyer requirements on condos in Miami, which has hurt pre-sales of various condo developments (and Rubio recently called for a broad money laundering investigation). No one mentioned that RevPAR was flat and finally increase over the last 2 Q's in Manhattan. These are critical data points for OZK. I'm sure there are many others I don't know about.

 

The only long thesis I ever see, which doesn't resonate with me, is "Gleason did well as a community banker in Arkansas and Texas, so I trust his ability to be the #1 underwriter of condo C&I in NYC and Miami". There's no data to support that conclusion because it was a recent and major business strategy shift. OZK's historical numbers have nothing to do with OZK's current loan book or future results. They aren't an Arkansas bank anymore. 

 

As to the outstandings, the 2015-2017 vintages are the main concern. The lending that has been criticized only started in 2014 and ramps in the 2015-2017 period. That's the point of the NYC as a % of book comment. That's why Turnberry matters. This is the widely talked-about short thesis. OZK also happens to be a bank so this all takes time to play out. Whether the short thesis will prove out or not will be discovered over the next 24 months or so. We shouldn't have expected it to play out much earlier.

 

On 1-4 multifamily loans during this vintage:

https://www.theinstitutionalriskanalyst.com/single-post/2017/11/20/Is-Multifamily-Lending-a-Threat-to-US-Banks

* Note LGDs were actually negative, so some market participants surely have ridiculous assumptions. Somehow OZK took large market share in competitive markets, but the assumptions backing the underwriting are conservative? That doesn't feel like common sense. Most of these loans were underwritten when cap rates were lower. We'll see, but OZK ultimately can't dictate the market and their NYC relationships are <5 years old. How strong are they or were they just the highest bidder between 2015-2017?

[AdjustedEarnings]

Thanks everyone.

 

I have just reviewed quite a bit of their activity in New York. Structures, etc. are difficult to get hold of unless I go get on the ground myself. Plus, structures come into play if a loan is going bad or about to. The properties these guys are doing will sell very well (I feel) in most economic conditions. So, from what I have seen, I feel confident NYC is not going to be an issue (based at least on currently extended credits). I expect to review the Miami file soon, though I'm expecting it to look much like NYC, but we'll see. I also feel that the reduction in RESG, as is now occurring, is not consistent with growth aggression (and is not at all similar to Corus). Given all of that, I've decided to hold on to my position and maybe increase it below $23, if Miami looks okay and all else stays the same. My main concern is on the deposit cost side and I'm not sure any clarity can be obtained here for now. Hence the 'maybe' in increasing the position. To me, that's the only issue long term, though a 'not-easily-resolved' issue.

 

I suppose both sides understand the other's view. So it simply comes down to reaching two difference conclusions based on the same data.... which means, we must simply wait and see what happens. Hope we're all around COBF in 24 months to check up on this!

[Shooter MacGavin]

This isn't directed at you AdjustedEarnings since I mostly agree with you, it's just a general comment around the concern raised around OZK's "geographic concentration".

 

I personally find the "fear of concentration" in NYC argument to be completely irrational.  The NYC tri-state area has a GDP of $1.5T and 20M people.  That's ~8% of the US economy and larger than the population of Switzerland, Hong Kong, Greece, Israel, Luxembourg etc etc.  By itself it's the 60th largest country in the world by population with a GDP per capita (if Wikipedia is to be believed) of $84k.  Additionally, the area, particularly New York City, draws investment capital from all over the world.

 

Generally speaking, I wouldn't care if a bank had 100% of its loan book in the NYC area if they knew what they were doing.  It's much better than having loans all over the country in places like Wyoming, Idaho, Kansas etc for the sake of diversification and weaker lending standards.  In a recession, the places with lesser wealth, populations and economic activity are more likely to get impaired.

 

Most small and middle size businesses in New York have 90%-100% of their revenue from the area.  So what?  Now there may be pockets of over-supply in products such as condos, multi-family, different competitive dynamics etc, and that is a different discussion. The geographic concentration issue however is irrational in my view.

 

I mean if OZK's NYC concentration by itself is an issue, then maybe we should short every bank in Switzerland, Luxembourg, Iceland,Singapore etc because their geographic concentration would be incredibly egregious relative to OZK. 

 

 

[khturbo]

To kind of piggy back what Shooter said, I think it's absolutely the point to make these low LTV loans in the bigger metro areas. I might be scared to be a developer there for a lot of the reasons you guys point out, but when you have scarce land it's really hard to get hurt on low LTV. You could be making 20% LTV loans in second or third tier cities and get in trouble because the projects could very well just be worthless.

 

You can't get a worthless asset in NYC, LA, etc. Obviously you can still get in some trouble, but the odds that something kind of goes to $0 are very, very low. It makes me feel more comfortable, not less, that these loans aren't in Arkansas.

[AdjustedEarnings]

I agree with the above two responses (though it hardly helps to create an echo chamber of similar opinions, so I will keep it short. I will also refrain from posting much on OZK going forward as anything I could intelligently say, I already have). For those that visited Manhattan, LA proper, or Miami beach fronts, even in 2008-2011, how many half-built struggling buildings did you see? This is partially my reason for thinking that the sell-through on NYC is going to be okay. I'm extremely familiar with the NYC area and am confident that what they're financing will sell well (and if not well, it'll still sell). You just have to look at the individual projects and you'll know. That's also where their concentration of loans comes in handy. There aren't 1000s of small loans scattered all around with little oversight and reliance on diversification to reduce risk. Might there be a price haircut to move the product? Sure, but that eats into the equity return not senior debt. Not many developers are going to 'walk' from a midtown Manhattan project in which they have 20-30% equity on account of a price discounts (yes, that is after the mezz piece which OZK's 50% LTC/LTV doesn't include). This is not being built in Dusty Town, TX. There's a difference in well-located, sought-after NYC/Miami/LA real-estate and tier C and tier D markets. Further, Blackstone/Brookfield/etc. (all names familiar to those on here) have amassed RE funds totally capable of taking over a good project at a decent price. "C&D banks can become stuck with REOs that take years to get out of at fire-sale prices. Thus, LTVs can never materialize" is generally true, but is it true on 30th and Madison?

[Guest Schwab711]

if OZK's NYC concentration by itself is an issue

It's not. Respectfully, I think folks are taking the wrong message from the negative opinions on OZK.

 

The location and asset types being lent against are being repeated imo because:

1. OZK recently entered big city markets. Most NYC banks have been there for awhile. It's a competitive market, unlike, say, Springfield, OH. RESG originally only lent in TX/AR. The strategy has been to take that working model in those locations and use it in bigger cities with more origination potential. If you like that strategy, great, you get OZK at 1.1x TBV. If not, great, OZK has that bank model and you can bet against it.

 

2. These assets had/have high valuations in major cities, especially from 2014-2016 (which isn't necessarily bad if the properties/land appreciate at above-average rates, as implied in the cap rates). Valuations still are high relative to UST, but at least the yield curve has shifted up (rates couldn't feasibly go much below 0% so cap rates based on 0% rates are potentially riskier). This isn't an OZK specific problem. You are seeing a lot of banks being scrutinized right now. OZK is one of them.

 

3. NYC (and most major cities like Miami/LA) have relatively higher asset volatility, as do development projects, in the long run. High volatility assets are more risky to lend against. The high volatility is partially due to prior above-average land/property appreciation (which is great). It also means prices can decline too. Depending on views on one's near-term asset volatility views, they may be bearish on OZK. It might not be primarily due to NYC specifically. It's the delta on asset valuations underlying the loans and what that might mean for loan performance.

 

As a quick side note to #3, part of my CNND thesis is based on the contra. Rochester, NY has one of the lowest historical RE volatility rates in the country. With relatively low banking competition as well, it's a relatively ideal market to lend to. Rochester RE will not see price appreciation like NYC, but that's ok.

 

Like you guys, I prefer investing in banks with good local economies, but banks in NYC are capable of failing, as you mention. Senior lending doesn't necessarily guarantee solvency/liquidity, as you mention. Interest earned on a loan should compensate for your risk profile. HCFL (Springfield, OH) had a 20-year CAGR of ~9%, despite absolutely terrible economic conditions. You just deal with the assets/liabilities present.

 

https://www.npr.org/2016/09/19/493920060/springfield-ohio-a-shrinking-city-faces-a-tough-economic-future

[rawraw]

 

I think the point I was making is being missed. If you are truly only interested in RESG then there's no sense buying OZK now since RESG originations will be declining for several Q's. CRE exposure is too high right now. They have to loan because they have variable funding, so L:D can't decline with CRE exposure. RESG is handcuffed for at least another year and the rest of the bank is commodity lending or below-average crap. That's my point on the quasi-SOTP view of OZK. That gets to one of my other points that now OZK has vintage risk with CRE because of their poor rate management. It's just one more angle to look at the bank.

Schwab,  I'd really like to understand your point.  Can you let me know what I am missing?  This is how I interpret your position:

 

1) From history, we've seen banks have similar characteristics as Ozarks and they were time bombs.

2) They are making loans in real estate markets that are at high valuations without relevant experience.

3) They are making non-recourse loans that others do not make, so the risk profile must be higher than we know.

 

When we look at RESG, it isn't even based in Arkansas.  The lenders in RESG are not lenders from the bank in Arkansas -  they have very different backgrounds.  I just don't understand the conflation between where the branches are and where the employees have gotten their experience.

 

I also don't understand the focus on margin.  I am focused on making decisions today on OZK, which is trading barely above book value.  The long thesis from the past doesn't really matter to me, except for the assumption of good credit is still important (and if new data refutes that, then this should go lower).

 

I do not  need impressive growth in earnings to justify the current valuation - yes this was an issue when OZK was trading at a much higher multiple, but now we have the opposite problem where the market is assuming very dire outcomes for OZK.

 

Still seems to me this comes down to applying rules of thumb to OZK based on what we can observe and have observed of other banks previously.  And to me this is the opportunity right now, because I think those rules of thumb are often correct but sometimes produce false positives.

 

 

 

[SmallCap]

Can I tell you all a very sad story.

 

I picked up on this story because of Oddball and after doing some research I agreed with his basic premise so I took a very small put position of Nov $35 I paid $.30

 

I came back and did some further looking into it about 2 weeks ago and still liked the story but my options were coming close to expiration so I thought I would go out to May of next year.  So I put in two limit orders, one to buy the may options and one to sell the sell my current ones at .50 since it had been going between .30 and .35 cents for the contract I thought I might be able to sell out at a slight profit as I rolled my option dates forward.

 

Well I am sure you can guess the rest. one executed and the other didn't. I made a nice small profit and missed out on a nice large profit.

[bizaro86]

That has happened to me before. I feel your pain!

 

IB will let you do combo trades for options so they'll only execute if both legs can execute for one net price. You would have wanted a calendar spread.

[Guest Schwab711]

 

I think the point I was making is being missed. If you are truly only interested in RESG then there's no sense buying OZK now since RESG originations will be declining for several Q's. CRE exposure is too high right now. They have to loan because they have variable funding, so L:D can't decline with CRE exposure. RESG is handcuffed for at least another year and the rest of the bank is commodity lending or below-average crap. That's my point on the quasi-SOTP view of OZK. That gets to one of my other points that now OZK has vintage risk with CRE because of their poor rate management. It's just one more angle to look at the bank.

 

1. CRE exposure is >300%. It was as high as 461%. 300% is kind of like 100% L:D ratio (as you probably know).

https://mms.businesswire.com/media/20181018005855/en/685264/1/OZK_3Q18_Management_Comments_FINAL.pdf?download=1

(see p.11)

 

2. Funding matters because to lower CRE exposure, OZK has moved to RV/marine lending, which is more fixed rate loans. Variable expense/fixed income.

 

3. Because RESG loan origination growth is no longer growing proportional to the bank, you have higher concentration in CRE loans originated in specific years. As you know, loans are like wine. Some years good, some years less so.

 

 

Schwab,  I'd really like to understand your point.  Can you let me know what I am missing?  This is how I interpret your position:

 

1) From history, we've seen banks have similar characteristics as Ozarks and they were time bombs.

2) They are making loans in real estate markets that are at high valuations without relevant experience.

3) They are making non-recourse loans that others do not make, so the risk profile must be higher than we know.

 

Yes. I don't think OZK is a $0 either but this is all close enough.

 

 

When we look at RESG, it isn't even based in Arkansas.  The lenders in RESG are not lenders from the bank in Arkansas -  they have very different backgrounds.

 

RESG was originally based in Dallas, TX. As you can see in their financials, NY loans are first made in 2013 when the office opened. Obviously NY loans are made by NY folks. Overall balance sheet and treasury management/bank strategy is done by Gleason. Dan Thomas used to be the CLO (out of Texas). The strategy to move to NY/Miami/LA was still made by Gleason/Thomas. I don't know what to say.

 

 

The long thesis from the past doesn't really matter to me

 

This comment was only made in reference to criticism of a short thesis that hasn't played out. I was saying my short thesis has while the long thesis has not. Sounds like it is irrelevant with reference to you.

 

 

I do not  need impressive growth in earnings to justify the current valuation

 

Agreed. I'm arguing future margins because in some good outcomes, OZK is only worth 1x TBV because ROE is likely to decline. I think a singular focus on credit has made folks miss the move from 3x down to 1x. I think it doesn't make sense to completely ignore margins. It's obviously less important at 1x than 3x. But if margins decline materially, it's due to rising rates. Rising rates mean likely worse loan performance and values if OZK wanted or need to sell loans. That brings down 'true' TBV. Margins matter when your bank has NIM of 450 bps imo.

 

 

And to me this is the opportunity right now, because I think those rules of thumb are often correct but sometimes produce false positives.

 

Agreed. I wish longs good luck. I have no position and likely won't take one. Reasonable minds can disagree, as AdjEarnings said.

[oddballstocks]

Can I tell you all a very sad story.

 

I picked up on this story because of Oddball and after doing some research I agreed with his basic premise so I took a very small put position of Nov $35 I paid $.30

 

I came back and did some further looking into it about 2 weeks ago and still liked the story but my options were coming close to expiration so I thought I would go out to May of next year.  So I put in two limit orders, one to buy the may options and one to sell the sell my current ones at .50 since it had been going between .30 and .35 cents for the contract I thought I might be able to sell out at a slight profit as I rolled my option dates forward.

 

Well I am sure you can guess the rest. one executed and the other didn't. I made a nice small profit and missed out on a nice large profit.

 

I had written off my Nov 35's as well, then earnings and it was a nice day.  I have May 25s and picked up 15s.  The killer on this trade is rolling the options, but the leverage is incredible.  The gains from this past earnings pass for decades of rolling things forward.

 

If this market environment continues things could continue to slide down. The May options are after their next earnings call.  If sentiment suddenly turns negative and they have any more bad news it could continue to drop.

 

The next few months could be interesting.

 

[Cigarbutt]

Can I tell you all a very sad story.

I picked up on this story because of Oddball and after doing some research I agreed with his basic premise so I took a very small put position of Nov $35 I paid $.30

I came back and did some further looking into it about 2 weeks ago and still liked the story but my options were coming close to expiration so I thought I would go out to May of next year.  So I put in two limit orders, one to buy the may options and one to sell the sell my current ones at .50 since it had been going between .30 and .35 cents for the contract I thought I might be able to sell out at a slight profit as I rolled my option dates forward.

Well I am sure you can guess the rest. one executed and the other didn't. I made a nice small profit and missed out on a nice large profit.

If you have time, would like your perspective on why you classify this as a negative (or sad) result.

Do you mean process or outcome?

Knowing what you know now, would you have done things differently?

How do you see the situation going forward?

[Bluedevilvalue]

IMO, the next few years success will be predicated on how well 2015 - 2017 NYC and MIA loans perform. How much margin for error do they have here? Margins are ~20% for developers on these projects (from the info I've gathered) and Manhattan condo prices are down 10% y/y according to miller samuel. Their reserve provisions are quite low relative to peers and the high end supply continues to increase.

 

Do the people on the short side have a perspective on these two markets contracting in the near term, or is this short more so a bet on reckless financing to hit loan growth targets and keep up earnings growth in a low yield environment -- that at some point must lead to a misstep?

 

FYI, 20% of gleason's stock incentive is tied to NPL growth and another 25% to adjusted EPS growth. As NIM falls, they seem to be reaching further out on the risk curve to continue growth.

 

https://www.millersamuel.com/files/2018/04/Manhattan-1Q_2018.pdf