Author Topic: OZRK - Bank of the Ozarks  (Read 43394 times)

watsa_is_a_randian_hero

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Re: OZRK - Bank of the Ozarks
« Reply #20 on: February 07, 2017, 12:12:14 PM »
I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now. 


Larry

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Re: OZRK - Bank of the Ozarks
« Reply #21 on: February 07, 2017, 12:34:16 PM »
I currently hold OZRK and it has been a great ride. No doubt that real estate lending has been a great growth driver. Muddy Waters did a short piece on OZRK in last May which pressed the stock price. However insiders bought quite heavily and Dan Thomas who runs their real estate lending group bought about $200k of stock.

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

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


atbed

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Re: OZRK - Bank of the Ozarks
« Reply #22 on: February 07, 2017, 12:58:08 PM »
I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

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

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


Green King

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Re: OZRK - Bank of the Ozarks
« Reply #23 on: February 07, 2017, 01:01:28 PM »
What thepupil said plus look at their loan book.  I'm not sure how having 70% of your loans in construction loans is "conservative".

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

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

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

Most of their purchases were FDIC-Loss Sharing agreements.

Another red flag, their loan growth has come quickly:

2012: $2.67b
2014: $5.074b
2015: $8.273b
Q3 2016: $14b

They have almost doubled their assets in the last year.

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

ALLL/NCL: 33%
ALLL/Loans .18%
NPL/Loans: .78%

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

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

SlowAppreciation

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Re: OZRK - Bank of the Ozarks
« Reply #24 on: February 07, 2017, 01:02:23 PM »
I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

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

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

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

Green King

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Re: OZRK - Bank of the Ozarks
« Reply #25 on: February 07, 2017, 01:15:32 PM »
I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

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

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

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

You can only see who has been swimming naked when the tides comes up. So far it has not happened.
GK

rawraw

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Re: OZRK - Bank of the Ozarks
« Reply #26 on: February 07, 2017, 01:18:27 PM »
I understand where the shorts are coming from. But I reviewed many of OZRK's CRE loans and I am comfortable with the underlying development projects in the sample reviewed.

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

I also bought in the mid-30's last summer. But it is harder to get involved now. The price-to-book (~2.3x) is back to historical norms, so you really have to believe in management or the growth drivers (e.g. organic growth, acquisitions, interest rates, de-reg, tax cuts).
Can you explain what you mean by reviewing their loans?  Are you talking about the various press releases that disclose their bridge loans or something else?

While I agree in general with Oddballstocks approach to banks (he is pointing out a lot of things that should be pointed out), I think OZRK is an exception to these rules.  Unfortunately I can't publicly discuss the reasons why but atbed seems pretty up to speed on the stock.  This is a very unique bank and some of the typical rule of thumbs aren't as useful here.

But one of the things that makes OZRK attractive is the wide range of beliefs on the stock (as evidenced in this thread).  A year ago, the beliefs were much narrower and made the stock much more expensive.  These doubts have brought the multiple down, which I assume is why it is being posted here.  I always wondered why it wasn't discussed in 1H16 when it was really cheap.

SlowAppreciation

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Re: OZRK - Bank of the Ozarks
« Reply #27 on: February 07, 2017, 01:20:54 PM »
I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

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

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

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

You can only see who has been swimming naked when the tides comes up. So far it has not happened.

I don't disagree with this.

But just to play devil's advocate... they seemed to do pretty well during the financial crisis. How much farther could the tide go out?

Green King

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Re: OZRK - Bank of the Ozarks
« Reply #28 on: February 07, 2017, 01:23:39 PM »
I understand where the shorts are coming from. But I reviewed many of OZRK's CRE loans and I am comfortable with the underlying development projects in the sample reviewed.

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


As pointed out by oddballstocks given their loan growth over the last 4 years and correct me if i am wrong but I think loan sampling will likely be a false signal (confirmation bias) than anything else. Due to loan growth (loans they just made that had not yet shown its true character yet) and acquisitions (loans they didn't make) I am simply expressing my doubt.
GK

Green King

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Re: OZRK - Bank of the Ozarks
« Reply #29 on: February 07, 2017, 01:34:10 PM »
I would also point something out to those who have said they are aggressive because they'll make loans others wont.  I worry that in many cases lending today is rule-based and regulatory driven.  I think that there are probably many areas of lending with very good economics that traditional big banks won't touch because it doesn't fit into their rules-based box now.

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

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

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

You can only see who has been swimming naked when the tides comes up. So far it has not happened.

I don't disagree with this.

But just to play devil's advocate... they seemed to do pretty well during the financial crisis. How much farther could the tide go out?

Impossible to know growth can hide many problems. That is is why oddballstocks looked at the reserves after looking at the loan growth. Remember the subprime subprime mortgage crisis or SNL ? you make good loans first but in small quantity than you growth from the financial proof of that. The new loans are not the same as the old ones. Also in real world it cannot be as good as the old ones. Due to size, since size eventually will slow down all growth.

Good loans require regional dominance.
Long term relationships.
Underwriting culture. 
Smart people (there are more banks than bankers)
Structural advantages.
Capacity to suffer so as no one be influenced by Gresham's law.
« Last Edit: February 07, 2017, 01:50:17 PM by Green King »
GK